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28 November 2016

European Commission: New EU rules for the recovery and resolution of Central Counterparties

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The European Commission proposed new rules to ensure that systemic market infrastructures in the financial system, known as CCPs, can be dealt with effectively when things go wrong.

There are already high regulatory standards in place for EU CCPs, set out in the European Market Infrastructure Regulation. However, no EU wide rules are in place for the unlikely scenario where CCPs face severe distress or failure and therefore need to be recovered or resolved in an orderly manner. Today's proposal aims to put into place a recovery and resolution framework to CCPs which are systemically important for the financial system. This will ensure that the critical functions of CCPs are preserved while maintaining financial stability and helping to avoid the costs associated with the restructuring and the resolution of failing CCPs from falling on taxpayers. [...]

Key elements of the proposal

The proposed rules for CCPs set out provisions comparable to those in the recovery and resolution rules for banks and are based on international standards. However, as CCPs are very different businesses to banks, this proposal contains CCP-specific tools that better align with CCPs' default management procedures and operating rules, especially to determine how losses would be shared.

The proposed rules require CCPs and authorities to prepare for problems occurring, intervene early to avert a problem, and step in when things have gone wrong.

Preparation and prevention

The proposed rules require CCPs to draw up recovery plans which would include measures to overcome any form of financial distress which would exceed their default management resources and other requirements under EMIR. This should include scenarios involving defaults by clearing members of the CCP as well as the materialisation of other risks and losses for the CCP itself, such as fraud or cyberattacks. Recovery plans are to be reviewed by the CCP's supervisor.

Authorities responsible for resolving CCPs (i.e. resolution authorities) are required to prepare resolution plans for how CCPs would be restructured and their critical functions maintained in the unlikely event of their failure.

Early intervention

Early intervention will ensure that financial difficulties are addressed as soon as they arise and problems can be averted. CCP supervisors are granted specific powers to intervene in the operations of CCPs where their viability is at risk but before they reach the point of failure or where their actions may be detrimental to overall financial stability. Supervisors could also require the CCP to undertake specific actions in its recovery plan or to make changes to its business strategy or legal or operational structure.

Resolution powers and tools

In line with the guidance of the Financial Stability Board, a CCP will be placed in resolution when it is failing or likely to fail, when no private sector alternative can avert failure, and when its failure would jeopardise the public interest and financial stability. In addition, it could be placed into resolution where the use of further recovery measures could compromise financial stability even when the conditions above are not met.

Cooperation between national authorities

CCPs are cross border in nature, with the biggest CCPs operating internationally. It is important that authorities cooperate across borders to ensure effective planning and orderly resolution if needed. The proposal establishes so-called resolution colleges for each CCP containing all the relevant authorities including the European Securities and Markets Authority (ESMA) and the European banking Authority (EBA).

The existing colleges under EMIR and the newly set-up resolution colleges should jointly undertake the specific tasks allocated to them under this Regulation. ESMA will facilitate joint actions and act as a binding mediator if necessary.

The draft Regulation will now be submitted to the European Parliament and the Council of the EU for their approval and adoption.

Text of the proposal

© European Commission

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