Clément Rouveyrol, Market Infrastructure Expert, ECB Oversight Division, takes us through current regulatory priorities for CCP recovery and resolution, following a presentation by Dr. Corinna Freund, Principal, ECB Oversight Division to the WFE Working Committee last month.
In recent years, international standard-setting bodies have strived to develop and refine recovery and resolution frameworks for central counterparties (CCPs). In 2014, CPMI-IOSCO and the FSB published landmark reports respectively on the recovery and the resolution of financial market infrastructures. These were complemented in July 2017 by an update to the CPMI-IOSCO report and a complementary FSB guidance on CCP resolution planning. Together, these international standards form a detailed and comprehensive framework for CCPs and regulators to undertake recovery and resolution planning.
However, CPMI-IOSCO has noted significantly delays in CCPs’ implementation of its 2014 guidance on recovery. In addition, while some authorities have begun setting up international crisis management groups to discuss resolution planning for their systemically important domestic CCPs, progress has been slow as a result of institutional challenges and of the lack of an appropriate regulatory framework.
In the EU, the Commission published a legislative proposal in November 2016, which would set up an EU framework for CCP recovery and resolution. The proposal remains under discussion in the EU Council and the European Parliament. It is expected to remain broadly in line with international guidance, with some adjustments: it could exclude widely rejected resolution tools such as initial margin haircutting, consider the impact of resolution on CCP clients, and provide more flexibility for resolution authorities, in connection with a broader conceptualisation of the no creditor worse off principle (to avoid that this key protection of the property rights of creditors generate excessive compensation claims, especially if they have benefitted from the resolution in actual economic terms).
The EU legislative process has been affected by the ongoing debate on the structure of CCP supervision triggered by the June 2017 Commission proposal on “EMIR 2”, given its potential impact on the institutional set-up for CCP resolution in the EU. While there is broad agreement that the allocation of responsibilities between EU and national authorities should be consistent in supervision and resolution, the balance between the powers of national supervisors and other relevant EU regulators is difficult to strike. Some argue that national fiscal capabilities would need to fund CCP resolution, and therefore that national authorities should have the last word on CCP risk management. However, before public funding is needed, financial losses would mostly be passed on to CCP participants located in a variety of Member States, given the cross-border interconnectedness of CCPs. This would argue in favour of more EU integration in CCP supervision and resolution planning.
In parallel, there is still further work to be done at the international level. CPMI-IOSCO has turned to the efficiency of default management auctions, a key component of CCP default procedures and therefore an essential step in avoiding CCP distress. The FSB is studying the need for further guidance on CCP resolution funding, and the treatment of CCP equity in resolution. This last issue is particularly difficult given the diverging interests of CCPs and their participants.
The ECB is focusing in particular on two aspects: first, recovery and resolution planning should be based on more realistic cross-CCP stress testing and crisis simulations, which will require close supervisory and central bank involvement. In addition, while there are no requirements for resolution funding at this stage, any experience from such CCP or supervisory exercises should be used to assess the adequacy of this funding.
Secondly, from an institutional standpoint, close coordination between supervisors, central banks and resolution authorities is needed more than ever to conclude on international standard-setting work on resolution issues, to carry out international commitments for recovery and resolution planning through comprehensive frameworks in all major jurisdictions, and to ensure meaningful involvement in recovery and resolution planning of all relevant authorities from jurisdictions in which a CCP has a financial stability footprint.