Fidest – Agenzia giornalistica/press agency

Quotidiano di informazione – Anno 32 n° 335

Deal struck on Clearing houses’ recovery and resolution plans

Posted by fidest press agency su martedì, 30 giugno 2020

Central counterparties (CCPs) should have detailed recovery plans with a harmonised set of tools for restoring their finances with no cost to taxpayers.A deal between the EP the Council negotiating teams struck on Tuesday evening provides a harmonised risk management system, designed to enable CCPs in difficulty to continue clearing services while minimising the risk that taxpayers might have to bail them out.CCPs sit between buyers and sellers of stock, bonds or derivatives and shoulder the risks of a transaction party default. Due to the growing value and volume of the transactions they handle, they have in recent years become systemically important and are often deemed “too big to fail”.Negotiators agreed to distinguish between a “default event” when one or more clearing members fail to honour their financial obligations and a “non-default event” such as a business failure incurring losses. They want CCPs to draw up comprehensive and effective plans for dealing with both cases. The main goal of a recovery plan is for a CCP to continue providing clearing services without any public financial support.CCPs are already obliged to hold capital and their clearing members contribute also to a default fund. In case of default of a clearing member, CCPs should use their own resources (skin in the game) and may require other financial contributions from non-defaulting members before the authorities step in.Additionally, MEPs introduced prohibition or restriction of dividends and bonuses in case of a default event caused by mismanagement. Such a provision for sound risk management that would keep CCPs’ capital available in case of recovery.Finally, negotiators agreed, following the EP team’s insistence, to introduce an additional, pre-funded second skin in the game to be used after the default fund, which would be further defined by ESMA. This proportional and risk-based requirement for additional funds would further contribute to the protection of taxpayers and increase the incentive for sound risk management.Member States where a CCP is established must designate one or more resolution authorities (such as national central banks or competent ministries), which would decide that a CCP is failing or likely to fail, and would be empowered to apply a combination of the resolution tools.Negotiators agreed on a closed list of resolution tools including cash calls (additional contributions) to non-defaulting members twice as big as a default fund, variation margin gains haircutting – reduction of the value of any gains payable by CCP to non-defaulting members, sale of business and government stabilisation tools as a last resort. They also envisaged a review clause in order to re-assess the list.
Resolution should aim not to incur greater losses for shareholders, creditors, clearing members and direct clients of the CCP than they would have incurred in the case of non-intervention and insolvency of the CCP – compliance with “no creditor worse off” principle.Negotiators agreed that when a CCP in a non-default case reduces payments to non-defaulting clearing members and clients it should recompense them, once its health is restored, through cash payments or ownership in future profits.
Additionally, it was agreed that contractual arrangements allowing clearing members to pass losses on to their clients in case of the resolution should also include, on an equivalent and proportionate basis, the right for clients to any compensation that clearing members receive. These provisions should also apply to indirect clients.Some technical work on the text is now under way by the services of the three institutions. Afterwards the agreement reached by the EP negotiating team will have to be approved by the ECON committee and a plenary vote. The Council also has to confirm it.

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