Overall, the organisations support the initiative and generally endorse the approach of CPSS and IOSCO in defining guidelines for the recovery of financial market infrastructures (FMIs).
EACB, EBF, ESBG
With one important exception, the TWG supports the main recommendations in this report so far as payment systems are concerned.
The exception relates to section 3.7.2 Cash calls on participants (“assessment power“) which appears to relate to all types of FMIs including payment systems. If so, the TWG has a major concern with the reference to “contract tear-ups“. Since this term is not defined in the document, interpretation would presumably fall to the courts which of itself creates uncertainty. However, on its face, it would appear to imply that CPSS – IOSCO may be suggesting that FMIs should create ex-anti powers to tear-up legally binding contracts. In like vein, the TWG believes that “forced allocations“ should only be permitted when allowed for in ex-anti documentation.
The TWG members not only regard this as being highly undesirable in relation to payment systems but fear that it could have unforeseen implications in relation to legal enforceability and potentially infringe mandatory provisions of law, particularly in jurisdictions with strong “unfair contract terms “legislation. Another concern is whether it may affect finality.
Full response
EBF
While the report generally goes in the right direction, the EBF believes that further adjustment could improve its content significantly, namely that:
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Transparency and certainty of recovery plans and tools towards FMI participants should be enhanced
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Recovery plans should be established in close cooperation with FMI participants
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The focus of recovery planning should be on continuity of critical services
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Recovery tools should not provide for unlimited liability of FMI participants
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Using auctions as a recovery tool has limits
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More attention should be given to the importance of record keeping
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FMI participants should have no liability for non-critical services
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Competition between FMIs may bring opportunity of substitution.
Full response
IIF/ISDA/TCH
The organisations acknowledge that a disorderly default management or recovery process could instigate significant market disruption; therefore, it is critical to ensure that any measures to prevent a foreseeable default and ensure an effective recovery process are employed. It follows that the potential for such a scenario should be already considered when evaluating the appropriateness to mandate certain products for clearing. Where such assessment determines that a product is difficult or likely unmanageable, particularly in a default scenario, the product should not really be cleared to begin with, and certainly clearing participants should not be forced to clear such product.
It is accepted that scenarios may arise where loss allocation mechanisms are deemed ineffective, and absent any further voluntary mechanisms, CCP service termination, and, where the clearing service is full recourse to the CCP, resolution must ensue.
Full response letter
© ISDA - International Swaps and Derivatives Association
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