AIMA supports the development of further guidance on robust measures and a consistent underlying framework, seeking to avoid the failure of any systemically important financial market infrastructure (SIFMI) in the first instance and, should failure nonetheless occur, to enable the orderly, fair and transparent resolution of such SIFMI without recourse to taxpayer funding through the implementation of a proportionate resolution plan.
It agrees that there needs to be a level of flexibility built into the regime to manage the recovery and resolution of CCPs, to accommodate the specificities of individual CCPs and the different circumstances which may trigger recovery and/or resolution. However, we believe there should be a strong underlying framework to ensure there remains a level of consistency and predictability for direct and indirect participants, coupled with close supervision by supervisory authorities during recovery, and active oversight by resolution authorities throughout a resolution process.
AMG urges the FSB, CPMI and IOSCO, in their review of CCP resilience, recovery and resolution standards, to consider the interests of clearing members’ customers, many of whom have increased their centrally cleared positions due to regulatory directives. AMG’s members are fiduciaries that manage investments for clearing member customers including pension funds, retail investor funds (e.g., mutual funds and UCITS) and private funds, among others. AMG members, in managing their clients’ investments, generally clear positions that are capable of being cleared. This direction has been imposed both by direct regulation of OTC derivatives and indirect pressures that have increased the costs of uncleared transactions. The value of this shift to clearing will depend in large part on whether asset managers’ clients—ultimate stakeholders of cleared positions with no control of the CCP and no stake in the CCP’s profits—are protected by CCP resilience, recovery and resolution standards set at an international level through the CPMI, IOSCO and FSB and implemented via national regulation. Our comments below recommend stronger standards that would benefit all market participants, including customers, and further recommend safeguarding certain customer protections.
It is important that principles and rules on CCP resolution take into account interoperability arrangements between CCPs and are designed in such way that contagion risk is limited, as envisaged by European legislation (‘EMIR’). EMIR includes specific rules which are aimed at limiting contagion risk between interoperable CCPs. EMIR requires the interoperable arrangements and risk management of interoperable CCPs to ensure that a CCP is able to manage the default of clearing members without affecting the interoperable CCPs. More specifically, per EMIR requirement, a CCP may avail of the collateral provided in the context of an interoperability arrangement only in case of a default of the providing CCP. A defaulting CCP is required to return the collateral provided in the context of an interoperability arrangement to the providing CCP. In addition, the ESMA Guidelines and Recommendations on interoperability arrangements3 do not allow CCPs to contribute to each other’s default funds or other financial resources.
The Associations believe that CCP resolution regimes supplemented by viable strategies for a CCP’s resolution are crucial and view the following as key principles to consider in developing CCP resolution regimes and strategies:
Authorities should establish and clearly define, on an ex ante basis, objective conditions and considerations for when to commence a resolution of a CCP, as well as the strategies that they would use in such a resolution, to allow clearing participants2 to risk manage their cleared portfolios.
Commencement of resolution should not be automatic or presumed, allowing the possibility for a CCP-led recovery to continue in certain situations (provided that implementation of recovery measures is subject to regulatory supervision and oversight).
A careful consideration of all facts and circumstances at the time of a potential resolution is critical.
Aside from statutory powers available to resolution authorities, the sequence of tools set forth in CCP rulebooks and publicly-disclosed resolution strategies should guide how loss allocation and position rebalancing proceeds in a CCP’s resolution. Resolution strategies should also disclose how resolution authorities expect to use their applicable statutory power together with their enforcement of CCP rulebooks.
CCP rulebooks should provide for senior debt claims to clearing participants who suffer losses from the exercise of variation margin gains haircutting (VMGH) or partial tear-ups (PTUs) in CCP recovery and/or resolution.
CCPs are more than a market infrastructure or utility and they do themselves bring risk to the financial system. CCPs make decisions on a daily basis that impact their risk profiles, including introducing new products, setting membership criteria and establishing requirements for margin and default fund contributions. Accordingly, CCPs must contribute appropriate amounts of “skin-in-the-game” (SITG) to their default “waterfall,” provide claims to clearing participants who suffer losses from the use of certain tools in recovery and/or resolution and ensure that their equity is not shielded from losses in resolution.
Full FIA response
LME Clears consider that the discussion note does identify the relevant aspects of CCP resolution that are core to the design of effective resolution strategies. It would like to stress the following points made in the EACH response:
• Importance of incentives – a CCP resolution regime must not negatively disrupt the incentive structure of a CCP. In particular the incentive to participate constructively in the recovery process must be maintained.
• Importance of restoring a matched book – this must underpin any successful CCP resolution regime.
• The fact that CCP resolution would only ever result from very extreme circumstances (indeed circumstances that went beyond the “extreme but plausible” standards for stress testing laid down by international standards).
• Global consistency – we welcome the efforts of the FSB to establish global standards but emphasise the importance of consistent application of such standards in order to achieve true consistency.
LME Clear would also encourage transparency between the resolution authority and each CCP during the design of the resolution plan. A CCP will be well positioned to understand the limitations of its recovery plans and rules (as well as the appetite of clearing members to absorb certain specific risks) and can assist the resolution authority in designing a resolution plan that can meaningfully supplement and complement the recovery phase and therefore maximise the chances of any resolution phase being successful. The same resolution plan would not be appropriate for all CCPs. A resolution plan needs to be tailored to individual CCPs.
© FSB - Financial Stability Board
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