The International Swaps and Derivatives Association (ISDA) has published a paper containing recommendations for a comprehensive recovery and resolution framework that would ensure central counterparties (CCPs) can withstand severe market stress. In doing so, the ISDA recognises that these strategies will necessarily have to vary by jurisdiction and by CCP, based on different CCP structures and existing legal regimes.
In the paper, the ISDA sets out the key points that should be considered when implementing CCP recovery and resolution mechanism. In particular, the ISDA recommends:
- a resolution regime for CCPs that should indicate a time at which resolution could commence, but should allow flexibility for recovery to continue beyond time;
- clearing participants to have maximum transparency regarding the key elements of, and triggers for, a CCP resolution;
- CCP assessments on clearing members must be capped in aggregate across recovery and resolution;
- subject to safeguards, variation margin gains haircutting could be used to allocate losses at the end of a CCP’s default waterfall;
- initial margin haircutting should never be permitted;
- subject to safeguards, partial tear-ups could be used to rebalance a CCP’s book if an auction or similar voluntary mechanism fails to do so;
- forced allocation of positions to non-defaulting clearing members should never be permitted;
- clearing participants suffering losses beyond a certain point in a CCP recovery or resolution must receive claims that position them senior to existing CCP equity holders;
- it is appropriate for clearing participants to bear at least a portion of some non-default losses, but CCPs and their shareholders must bear the risk of non-default losses that are solely within their control; and
- access to liquidity from central banks on standard market terms is necessary to support CCP recovery and resolution.
View ISDA recommendations for CCP recovery and resolution framework, 18 September 2017