As central counterparties (CCPs) continue to play an increasingly important role in the global financial system, The Clearing House and the International Swaps and Derivatives Association today issued a white paper identifying key issues that regulators should consider as they develop a comprehensive resolution framework for systemically important CCPs.
As a result of global mandates that require standardized derivatives to be centrally cleared, it is estimated that more than 70% of swaps are currently cleared, which has led to significantly increased concentrations of risk within CCPs. Earlier this year, the Financial Stability Board (FSB) announced that it will issue for public consultation standards or guidance for CCP resolution planning, resolution strategies and resolution tools. This white paper is intended to inform that effort.
“Having devoted considerable thought and resources to ensuring the resolvability of the world’s largest banks, it is now time to take the lessons learned in that process and ensure that CCPs -- where much risk has been concentrated by the post-crisis regulatory regime -- are equally resolvable,” said Greg Baer, President of The Clearing House Association.
“The primary focus of regulators and market participants should be on CCP resilience and developing robust CCP recovery frameworks. Nonetheless, we can’t ignore the issue of CCP resolution and the impact the collapse of a CCP would have on financial stability. It’s therefore important this issue is considered in depth,” says Scott O’Malia, ISDA’s Chief Executive.
The paper, Considerations for CCP Resolution, identifies potentially significant resolution tools or approaches for further discussion and evaluation by the official sector and industry. The paper attempts to both highlight and endorse the thoughtful guidance that has been codified in the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions and to document and identify, from the perspective of clearing members and other clearing participants, important, related considerations that must be addressed in developing a workable and comprehensive resolution framework for systemically important CCPs.