On 16 November 2020, the Financial Stability Board (FSB) published final guidance on financial resources to support central counterparty (CCP) resolution and on the treatment of CCP equity in resolution.
Ensuring the availability of adequate resources and tools for CCP resolution and understanding the potential for certain resources and tools to have an adverse effect on financial stability in a CCP resolution scenario is important. The FSB has prepared the final guidance to support jurisdictions and authorities in determining whether there is a gap in the resources and tools available for resolution that must be addressed. To help make this determination, the final guidance focuses on the assessment of the adequacy of financial resources and of the treatment of equity in the context of resolution. Resolution authorities should conduct such assessment in cooperation with the CCP’s oversight and/or supervisory authorities. For CCPs that are systemically important in more than one jurisdiction, such assessment should be reviewed and updated on an annual basis and the results of such review / update be discussed within the crisis management groups.
The final guidance has two parts. Part I sets out guidance on assessing the adequacy of financial resources to absorb losses and to cover other costs in resolution. Part II sets out guidance on approaches to the treatment of CCP equity in resolution. The final guidance does not replace or supersede the following documents: the FSB guidance on CCP resolution and resolution planning (FSB CCP guidance), the FSB key attributes of effective resolution regimes for financial institutions and implementation guidance on financial market infrastructure resolution in Appendix II, Annex 1 to the key attributes. Existing guidance in these documents even if not restated or referred to in the final guidance, remains relevant to CCP resolution. The final guidance does not address wind-down plans of systemically important CCPs.
To further the objectives of the FSB CCP Guidance, the final guidance sets out in detail a five-step process for assessing the adequacy of financial resources and tools available to authorities to support the resolution of a CCP:
- Step 1: identifying hypothetical default and non-default loss scenarios (and a combination of them) that may lead to resolution.
- Step 2: conducting a qualitative and quantitative evaluation of existing resources and tools available in resolution.
- Step 3: assessing potential resolution costs.
- Step 4: comparing existing resources and tools to resolution costs and identifying any gaps.
- Step 5: evaluating the availability, costs and benefits of potential means of addressing any identified gaps.
The FSB will consider at the latest in five years after the publication of the final guidance whether further adjustments are needed to it in light of market developments and resolution authorities’ experience with using the final guidance.