The European Central Bank (ECB) has published a speech given by executive board member Benoit Coeuré. The speech is entitled Ensuring an adequate loss-absorbing capacity of central counterparties.

At the beginning of his speech Mr Coeuré notes that because of their growing systemic importance, central counterparties (CCPs) need to be exceptionally robust, and that means being able to cope with even extreme losses. To achieve this, it may be necessary to increase CCPs’ existing loss-absorbing capacity. However, Mr Coeuré adds that what is less clear is whether this can be done by having CCPs observe the existing international standards or whether there is a need for new requirements that are far more demanding or more specific.

When discussing CCP risk management standards, Mr Coeuré states that if gaps were identified requiring the adoption of new global requirements the debate would have to be framed in an appropriate manner. For instance, there may be no single best solution for addressing concerns related to CCP safety. Optimal solutions may vary according to the business model of the CCP (including its ownership structure), according to the CCP’s risk profile (including the products cleared) and according to the size and concentration of exposures within clearing members (including the extent of indirect clearing). Mr Coeuré also mentions that drawing analogies between CCPs and banks need to be treated with caution as CCPs have a fundamentally different business model and liability structure.

When discussing effective CCP resolution as a tool Mr Coeuré states that CCP resolution frameworks are currently being designed and implemented across jurisdictions. The Financial Stability Board is reviewing CCP resolution regimes and resolution planning arrangements. Based on this review, it may develop minimum standards for CCP resolution planning, strategies and tools without resorting to a government bailout, and without resulting in contagion to other parts of the financial system. In addition, Mr Coeuré notes that the European Commission is preparing specific EU legislation.

If, after an in-depth assessment, authorities come to a conclusion that an additional source of financial resources is needed, Mr Coeuré discusses what form these additional funds should take. He reiterates that any bailout of CCPs with public money should be categorically excluded. Resolution plans should fully allocate losses to CCPs and their participants. He then briefly examines four ways of increasing resolution capacity:

  • to increase the amount of regulatory capital held by CCPs, and explicitly ring-fence a share of this capital as a means to recapitalise a new entity in a resolution scenario;
  • to make use of initial margin haircutting as a means to fund the resolution process and establish a new CCP;
  • to set up a cross-CCP resolution fund, much like the Federal Deposit Insurance Corporation or the Single Resolution Mechanism recently established for banks in Europe; and
  • for each CCP to establish its own dedicated recapitalisation fund, funded mainly by clearing members, with a proportional contribution from the CCP itself.

View Ensuring an adequate loss-absorbing capacity of central counterparties, 10 April 2015