Recovery and resolution planning for CCPs
Article from BaFin's 2017 annual report
The draft regulation published by the European Commission at the end of 2016 for the recovery and resolution of central counterparties comprises an obligation for CCPs to draw up recovery plans that take their specific business models into account (see info box "CCPs as risk factor").1
Note:CCPs as risk factor
The European Market Infrastructure Regulation (EMIR) has made the financial markets significantly more robust: OTC derivatives are now no longer cleared between banks, thus reducing the risk of contagion in the case of a bank's default. On the other hand, financial market participants have become much more dependent on CCPs. If a CCP defaults, this may damage the stability of the financial markets. In order to contain this risk, a recovery and resolution regime is required that at least ensures that the functions of CCPs that are critical for the financial markets are protected. The recovery and resolution regime of the Bank Recovery and Resolution Directive (BRRD) – implemented in Germany mainly by way of the Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz) – is only applicable to CCPs that are at the same time CRR credit institutions.2 In addition, the Recovery and Resolution Act is designed for banks and is therefore not adapted to counter the specific risks arising from the business model of the CCPs. In particular, the resolution mechanisms set out in the Recovery and Resolution Act, such as writing down liabilities in consideration for the issue of shares (bail-in), are not sufficiently effective for CCPs. In view of this fact, the EU Commission has developed rules for the recovery and resolution of CCPs.
In addition, the draft contains provisions for the case that a recovery fails or cannot be implemented because of a risk to financial stability. To this end, the draft specifies how to close open positions and settle uncovered losses through the resolution process. Uncovered losses may arise from the default of clearing members, normally banks (default losses). They may, however, also arise from the operating business of the CCPs themselves, for example as a result of IT disruptions or errors in managing the collateral clearing members have to provide (non-default losses). In accordance with EMIR and the further-going recovery actions of the CCP regulatory frameworks, the clearing members are initially called upon to cover the losses, at least in the case of default losses. A number of provisions are still in dispute among the member states, despite the ongoing negotiations. A compromise for the entire text of the regulation has been proposed by the Estonian Presidency of the Council. The negotiations in the Council working group will continue in 2018. The final draft report of the European Parliament was published on 31 January 2018.
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