The Financial Stability Board (FSB) recently published a public consultation report on ‘Guidance on financial resources to support CCP resolution and on the treatment of CCP equity in resolution’. The guidance will assist central counter party (CCP) resolution authorities.
Central clearing of standardised over-the-counter (OTC) derivatives is a key pillar of the G20 Leaders’ commitment to reform OTC derivatives markets in response to the 2008 financial crisis. Increased central clearing has simplified the previously complex and opaque web of derivatives exposures. In addition, more collateral is in place to reduce counterparty credit risks. At the same time, CCPs’ criticality to the overall safety and soundness of the financial system means that authorities must take steps to ensure that CCPs do not themselves become a source of systemic risk and that they can be successfully resolved without exposing taxpayers to loss.
The draft guidance is based on the concepts included in a discussion paper the FSB published in 2018. It takes into account the comments received in that earlier public consultation and feedback from the resolution authorities of CCPs.
Part I of the guidance proposes five steps to guide the authorities in assessing the adequacy of a CCP’s financial resources and the potential financial stability implications of their use. The authorities should:
- Step 1: identify hypothetical default and non-default loss scenarios (and a combination of them) that may lead to a resolution of a CCP;
- Step 2: conduct a qualitative and quantitative evaluation of existing resources and tools available in the resolution of the CCP;
- Step 3: assess potential resolution costs;
- Step 4: compare existing resources and tools to resolution costs and identify any gaps; and
- Step 5: evaluate the availability, costs and benefits of potential means of addressing any identified gaps.
Part II of the guidance addresses the treatment of CCP equity in resolution. It provides a framework for resolution authorities to evaluate the exposure of CCP equity to losses in recovery, liquidation and resolution and how (where it is possible) the treatment of CCP equity in resolution could be adjusted.
The FSB welcomes responses to the questions set out in the public consultation report by 31 July 2020.
Source: the Financial Stability Board (FSB)