The EACH response to the consultative report on Resilience and Recovery of CCP is published today. EACH welcomes that CPMI-IOSCO has undertaken to provide clarification in order to ensure a consistent application of the Principles for Financial Market Infrastructures (PFMIs) across jurisdictions.
Below you can find some of the key points included in our response:
Governance - While the level of detail included in the consultative report appears sufficient, we would welcome further clarification with regard to the role of the Board in a CCP’s governance structure. The CCP’s Board of directors is ultimately accountable for the operation of the CCP, while the day-to-day management responsibility lies with the CCP’s management. EACH considers it would be overly demanding to expect any Board to maintain the necessary expertise and skillset to undertake the day-to-day management of the CCP. Requiring the Board to do so would diminish the value of its independence, as the Board would be performing the role of the management.
Disclosure provided by CCPs - CCPs currently make available a substantial amount of information either to the public or to relevant stakeholders, in line with the different requirements included in international guidance, PFMIs and CPMI-IOSCO Public Quantitative Disclosure, and the main EU clearing legislation EMIR. EACH believes that the quantitative and qualitative information already disclosed by CCPs strikes the right balance between transparency and confidentiality and provides sufficiently comprehensive stakeholder disclosure. The quantitative information published by EACH Members can be found on the EACH website http://www.eachccp.eu/cpmi-iosco-public-quantitative-disclosure/
Procyclicality - The guidance contains significant prescription around the use of certain tools, primarily related to margin, to reduce procyclicality. Such prescription may ultimately restrict a CCP’s ability to appropriately manage risk, especially in times of high volatility or market stress. We would support the guidance around procyclicality to be based on an outcomes and principles based approach results in restrictive risk management.
CCP’s contribution to cover losses
o Default losses - EMIR requires CCPs to contribute some of their own capital to the default waterfall right before the use of the mutualised resources. Such dedicated resources (skin-in-the-game or SIG) provide a significant layer of pre-funded resources, in addition to providing additional, direct incentives for the CCP to perform prudent risk management. Furthermore, such resources align the interests of the CCP with those of its stakeholders in managing a default, thereby minimising losses and stabilising the market.
o Non-default losses - There are a variety of non-default stresses that could lead to losses at the CCP. Given the heterogeneous nature of such stresses, it is important to give separate consideration to each type of stress. Loss allocation for non-default losses should be proportional to the level of responsibility of each stakeholder involved.
Recovery planning - EACH believes that the guidance already provided on recovery planning in the CPMI-IOSCO Recovery Report of October 2014 is sufficient and appropriate as it provides a comprehensive list of recovery tools. CCPs should be allowed to execute fully their default management process and their recovery plan before the intervention of the resolution authority takes place. Early intervention should be considered as a tool of last resort as it would likely distort the incentives to ensure a successful recovery of the CCP.
Contributed | what does this mean?