On 19 September 2023, the Financial Stability Board (FSB) published a consultation report on financial resources and tools for central counterparty (CCP) resolution.
In the consultation report the FSB sets out a proposal for a toolbox approach as a global standard for CCP financial resources and tools for resolution. In a toolbox approach, resolution authorities would have access to a combination of resources and tools from the toolbox as options to use in resolution. The resolution toolbox comprises (i) a set of resolution-specific resources and tools available for resolution and (ii) if available, financial resources from access to non-exhausted recovery tools.
Seven financial resources and tools for CCP resolution have been identified:
- Bail-in bonds – subordinated debt or unsecured debt ranking junior to other liabilities issued by a CCP (or its parent) to recapitalise the CCP (through conversion into equity) and/or absorb losses in resolution. A CCP would issue bail-in debt in business-as-usual periods for use in a potential resolution scenario.
- Resolution funds – dedicated pre-funded resources, which can be called upon in resolution by a participating resolution authority in the fund and can vary in scope and membership.
- Resolution-specific insurance – a contract in which an insurer agrees to provide to the resolution authority or the CCP coverage for specified risks so that financial resources are available in a resolution of a CCP.
- Resolution-specific third-party contractual support (e.g., letters of credit, performance bonds, advance payment guarantees, or intra-group financial support) – contingent resources provided by a third party (which in some cases could be the parent or affiliate of the CCP) available to the resolution authority.
- Resolution cash calls – contractual or statutory provisions that enable the resolution authority to make one or more cash calls on the clearing participants up to a predetermined amount of funds once the CCP is placed in resolution.
- Statutory or contractual variation margin gains haircutting (VMGH) for resolution – a means for specifying that the resolution authority has an independent (de novo) right to delay, reduce, or cancel variation margin payments in resolution.
The FSB invites comments on the consultation report and associated questions, including supporting evidence where available. The deadline for responses is 20 November 2023.