In April 2015 the Financial Stability Board (FSB), together with the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO) agreed on a joint work plan to coordinate their action to enhance the resilience, recovery and resolvability of central counterparties (CCPs).
Under the work plan, the FSB agreed to:
“consider the need for, and develop as appropriate, standards or guidance for CCP resolution planning, resolution strategies and resolution tools, including cross-border coordination and recognition of resolution actions, which should build on the Key Attributes. Such standards or guidance would aim to ensure that any CCP can be successfully resolved without resort to a government “bailout”, and without resulting in contagion to other parts of the financial system.”
The FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes) and implementation guidance on financial market infrastructure (FMI) resolution in II-Annex 1 to the Key Attributes (the FMI Annex) set out a framework for FMI resolution which sits alongside the standards on resilience and recovery established in the CPMI-IOSCO’s Principles for Financial Market Infrastructures and its additional guidance. The Key Attributes and FMI Annex set out the objectives of FMI resolution and a range of powers and tools that should be made available to resolution authorities to resolve a failing FMI. They also state that authorities should develop resolution strategies and plans, and conduct resolvability assessments.
Importantly, the Key Attributes describe a number of resolution tools that should be available to authorities but do not discuss how these tools could be used or combined to develop strategies for effective resolution of CCPs. The international authorities believe that in some areas further guidance may be appropriate to help jurisdictions with implementing effective resolution regimes and to assist resolution authorities with developing credible resolution strategies and plans.
To this end the FSB has now published a discussion note on essential aspects of CCP resolution planning. The note seeks comments on certain aspects of CCP resolution that are considered core to the design of effective resolution strategies. The note covers:
- objectives of CCP resolution;
- resolution strategies;
- timing of entry into resolution;
- adequacy of financial resources in resolution;
- tools to return to a matched book;
- allocation of losses in resolution;
- non-default losses;
- application of the “no creditor worse off” safeguard;
- equity exchange in resolution;
- cross-border cooperation; and
- cross-border effectiveness of resolution actions.
Based on feedback to the note the FSB will develop proposals for more granular guidance by early 2017.
The deadline for comments on the discussion note is 17 October 2016.