The EU framework governing the resolution and recovery of failed central counterparty clearing houses (CCP) has been agreed and provides member states with a harmonised risk management system.
The European Parliament and European Council agreed the framework on June 23, which was welcomed by the European Commission and The European Association of CCP Clearing Houses (EACH), which described it as having a balanced incentive structure that ensures the robustness of the clearing ecosystem.
“It is another step towards making the EU’s financial system more resilient. It also adds an additional layer of safety for our financial system. This agreement places the EU at the cutting edge of international developments in this area,” declared European Commission vice president Valdis Dombrovskis.
In a statement, the Parliament said the two sides 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.
The statement read that CCPs must draw up comprehensive plans for dealing with both events, with the main goal being that a failing clearing house must continue providing clearing services without public financial support.
Other measures include CCPs using their own resources in the event of a default and calling on additional financial support from non-defaulting members before the authorities step in.
Regulators are to be given the power to insist on non-defaulting members providing up to twice as much capital as the clearing house default fund, along with the ability to reduce the value of any gains payable by a CCP to those members.
Dividend restrictions
The parliament scored a victory by inserting restrictions on CCPs paying dividends and bonuses in the event of them failing due to mismanagement, leaving more capital to assist with their recovery.
The parliament also managed to insist on CCPs providing additional upfront capital to act as a back-up to their default funds.
Member states, which host CCPs, must designate one or more resolution authorities, which are typically a central bank or a prudential regulator, which would deal with a failing clearing house. In the event of a CCP insolvency, resolution should proceed on the principle of ‘no creditor worse off’.
EACH said the text provides a clear path for authorities and stakeholders in the unlikely scenario of CCP recovery and resolution.
The European Council and the Commission are now drafting level 2 legislation, which will need approval by the parliament’s Committee on Economic and Monetary Affairs (ECON).
Kay Swinburne, vice chair, financial services at KPMG and former UK MEP in ECON said it took more than six years to reach the agreement.
“Having been involved in EU CCP legislation since 2009, it is a strange feeling to know that the UK will not need to implement this legislation,” she wrote in a blog post. “The tailored approach from the Bank of England with respect to recovery and resolution will stand apart, but at least the UK regulators have been protecting the taxpayer during this time!”
This article first appeared in The Banker's sister publication Global Risk Regulator.
