FSB releases guidance on CCP financial resources for resolution
24 November 2020 UK
Image: emerald_media/Adobe Stock
The Financial Stability Board (FSB) has published final guidance on financial resources to support central counterparty (CCP) resolution and on the treatment of CCP equity in resolution.
The recent periods of market turmoil have demonstrated the benefits that central clearing brings for global financial stability, according to the FSB.
Progress in implementing the G20 regulatory reforms agreed after the 2008 financial crisis has promoted the use of CCPs, and the shift to central clearing has also further increased the systemic importance of CCPs.
The chairs of the FSB, the committee on payments and market infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO) and of the FSB resolution steering group have proposed to collaborate on and conduct further work on CCP financial resources through their respective committees.
The partnership between committees during 2021 will consider the need for international policy on the use, composition and amount of financial resources in recovery and resolution to further strengthen the resilience and resolvability of CCPs in default and non-default loss scenarios.
This would include assessing whether any new types of pre-funded resources would be necessary to enhance CCP resolvability.
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.
FSB outlined the authorities should identify hypothetical default and non-default loss scenarios (and a combination of them) that may lead to a resolution of a CCP.
It also affirmed that authorities should conduct a qualitative and quantitative evaluation of existing resources and tools available in the resolution of the CCP, and assess potential resolution costs.
The guidance also suggested that authorities should compare existing resources and tools to resolution costs and identify any gaps; and evaluate the availability, costs and benefits of potential means of addressing any identified gaps.
Elsewhere in Part II of the guidance, the FSB addressed 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 the treatment of CCP equity in resolution could be adjusted.
According to the FSB, the guidance will support resolution authorities and crisis management groups in assessing the adequacy of financial resources for CCP resolution and provides guidance on approaches to the treatment of CCP equity in resolution.
In September, the European Commission adopted a time-limited decision to allow financial market players 18 months to reduce their exposure to UK CCPs as part of its post-Brexit plans.
The EU financial system’s heavy dependence on UK-based CCPs could potentially cause complications as the UK is due to leave the single market on 1 January 2021.
The temporary equivalence decision, which expires in June 2022, aims to protect financial stability in the EU and give market participants the time needed to reduce their exposure to UK CCPs.
The recent periods of market turmoil have demonstrated the benefits that central clearing brings for global financial stability, according to the FSB.
Progress in implementing the G20 regulatory reforms agreed after the 2008 financial crisis has promoted the use of CCPs, and the shift to central clearing has also further increased the systemic importance of CCPs.
The chairs of the FSB, the committee on payments and market infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO) and of the FSB resolution steering group have proposed to collaborate on and conduct further work on CCP financial resources through their respective committees.
The partnership between committees during 2021 will consider the need for international policy on the use, composition and amount of financial resources in recovery and resolution to further strengthen the resilience and resolvability of CCPs in default and non-default loss scenarios.
This would include assessing whether any new types of pre-funded resources would be necessary to enhance CCP resolvability.
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.
FSB outlined the authorities should identify hypothetical default and non-default loss scenarios (and a combination of them) that may lead to a resolution of a CCP.
It also affirmed that authorities should conduct a qualitative and quantitative evaluation of existing resources and tools available in the resolution of the CCP, and assess potential resolution costs.
The guidance also suggested that authorities should compare existing resources and tools to resolution costs and identify any gaps; and evaluate the availability, costs and benefits of potential means of addressing any identified gaps.
Elsewhere in Part II of the guidance, the FSB addressed 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 the treatment of CCP equity in resolution could be adjusted.
According to the FSB, the guidance will support resolution authorities and crisis management groups in assessing the adequacy of financial resources for CCP resolution and provides guidance on approaches to the treatment of CCP equity in resolution.
In September, the European Commission adopted a time-limited decision to allow financial market players 18 months to reduce their exposure to UK CCPs as part of its post-Brexit plans.
The EU financial system’s heavy dependence on UK-based CCPs could potentially cause complications as the UK is due to leave the single market on 1 January 2021.
The temporary equivalence decision, which expires in June 2022, aims to protect financial stability in the EU and give market participants the time needed to reduce their exposure to UK CCPs.
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