The Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) has on August 4 published for public comment a discussion paper on central counterparty (CCP) practices to address non-default losses (NDL). CCPs have become increasingly important in the financial system for managing counterparty risk, especially since the introduction of the clearing obligation for standardised OTC derivatives following the 2007–09 Great Financial Crisis.
Therefore, the resilience of CCPs in case of losses and liquidity shortfalls – whether they arise from the default of CCP clearing members or from non-default events (eg losses from cyber attacks) – has become critical for financial stability.
Non-default events can threaten a CCP’s viability as a going concern and its ability to continue providing critical services. Therefore, according to the Principles for financial market infrastructures (PFMI), CCPs must take action and have policies, procedures and plans for addressing NDLs, in addition to a sound risk management framework to mitigate and manage those risks.
This discussion paper seeks to advance industry efforts and foster dialogue on the key concepts and processes used by CCPs. It outlines current practices at various CCPs to address NDLs in business as usual (BAU), recovery and orderly wind-down scenarios. The discussion paper is not intended to create additional standards for CCPs beyond those set out in the PFMI. Nor is it intended to be an assessment of whether CCPs have appropriately implemented the standards set out in the PFMI regarding NDLs.
Published with this report is a cover note listing some of the specific issues on which the CPMI and IOSCO are soliciting input from industry and the broader public. The purpose of the paper is to elicit comments and feedback from a broad range of interested stakeholders.