08 November 2013

CPSS-IOSCO publish responses to consultation on recovery of FMIs: AIMA/MFA, EBA Clearing, Eurex Clearing, EACH

The report, published in August 2013, provides guidance to FMIs on how to develop plans to recover from threats to their viability and financial strength that might prevent them from continuing to provide critical services to their participants and the markets they serve.

AIMA and MFA

In situations where a CCP is failing, AIMA and MFA recommend its orderly liquidation where possible, provided that clients have immediate access to their collateral held by the CCP. However, where prompt and orderly liquidation is not possible due to the size and complexity of a CCP, the CCP’s recovery plans and tools should ensure that the CCP allocates losses in the fairest manner such that losses do not fall disproportionately on clients. Because CCPs are diverse in size and the products that they clear,8 CCP recovery plans and tools should also take into account the size of a CCP, the breadth of services that it offers, and the consequences to the broader financial system of its failure or cessation in providing clearing services.

Maximising transparency at all stages of CCP recovery planning and failure is vital to ensuring predictability for market participants, and therefore, maximising the orderliness of the CCP’s failure.

Full response

EBA Clearing

EBA CLEARING strongly advocates for differentiation per type of FMI (i.e. in particular a specific set of implementation guidelines for payment systems), thereby clearly distinguishing between FMIs that take on credit risk as principal and those that do not. FMIs should be promoted to design their recovery plans in such a way that they are usable, effective to maintain, and proportionate to the size and risk profile of the institution. Efficiency and effectiveness of recovery plans would plead for allowing tailor-made definitions of the scope and type of recovery tools for the given FMI.

With respect to recovery triggers, EBA CLEARING would like to share that the guidance should specify that the setting of (quantitative and qualitative) criteria should be done in consultation and coordination with the FMI’s oversight authority. Clear guidance should be provided on the entry and exit criteria of a recovery regime as well as its scope. FMIs should be given sufficient guidelines to be in a position to determine which events or the execution of which types of measures (depending on the FMI’s structure and activities) would place or trigger the entrance of such FMI under recovery. In the same vein, conditions of cessation of a recovery regime as well as required steps to be taken by the FMI’s governance and management bodies – in particular in the case implementation of the recovery plan leads to recovery -- should be specified.

Full response

Eurex Clearing

Eurex Clearing believes that there is a wide range of recovery measures which should be assessed individually by each FMI. Based on this assessment each FMI should be free in its choice of what measures to include its recovery plan, naturally subject to achieving the desired aims. A particularly powerful tool, variation margin haircutting, may be employed in order to distribute losses to a very large participant base potentially including clearing members and their clients. However, this tools application needs to be carefully designed in order to deal with positions that are subject to variation margin and premium margin settlement.

Variation margin cropping needs to encompass all products. Secondly a full allocation of losses resulting from a member’s default and a CCP re-establishing a matched book need to be achieved simultaneously. Acknowledging the highly disrupted market conditions that could trigger a CCP’s recovery plan, Eurex Clearing understands that none of the possible measures  are per se desirable for the CCP or its members. Nonetheless, Eurex Clearing appreciates the requirement to apply those measures that are least disruptive to the overall financial markets in any particular situation for any particular CCP.

Full response

European Association of Central Counterparty Clearing Houses

EACH is supportive of the recovery arrangements as set out in the report. It also strongly supports the objective of ensuring that the FMI can continue to provide its critical services without requiring the use of resolution powers by authorities. Furthermore EACH supports IOSCOs Principle of retaining a balance between automatic implementation of the recovery tools and discretion of the CCP.  Whilst it is appropriate for CCPs to ensure they have the powers required to implement comprehensive recovery tools, such power may not be fully in the control of the CCP. Governments should ensure that legislative and regulatory barriers which prevent a CCP from putting in place such comprehensive recovery arrangements are removed, and not put in place in future.

Full response

In futher reporting, Financial News says that buyside firms have labelled the use of their assets to support troubled clearing houses as unfair and unpredictable, deepening the divide among market participants on the issue of so-called living wills. 

BlackRock, the Investment Company Institute and the Alternative Investment Management Association all aired concerns on proposals that require buyside assets to be used if a clearing house runs into difficulties. All three were responding to a joint consultation from the International Organisation of Securities Commissions and the Committee on Payment and Settlement Systems on the recovery of financial market infrastructures. Plans for dealing with losses suffered by a clearing house – an entity that interposes itself between a buyer and seller of a financial instrument in order to guarantee a trade – are becoming more prominent because of new OTC derivatives regulations.

The International Swaps and Derivatives Association, which proposed a framework for dealing with struggling clearing houses in August 2013, said using buyside assets would ensure the management of a default is “transparent and predictable, rather than subject to the discretion of a resolution authority".

The European Association of Clearing Houses, which represents 22 clearing houses in the region, said buyside assets can serve as a robust tool for a final loss allocation in swaps and futures markets, adding that it is “beneficial to share losses from credit risks and liquidity shortfalls as widely as possible".

List of all consultation responses

IOSCO-press release

Original IOSCO-consultation

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