On 3 December 2019, HM Treasury published a letter from the Economic Secretary to HM Treasury, John Glen MP, to the House of Commons’ European Scrutiny Committee Chair concerning the current status of the draft Regulation on a framework for the recovery and resolution of central counterparties (CCPs).

Key points in the letter include:

  • on CCP equity bearing loss in resolution, Member States have agreed to include a new requirement for the use of the CCPs own resources in recovery, prior to the use of further financial contributions from clearing members. This additional CCP resource is not required to be prefunded;
  • the draft Regulation contains a clause specifying a review on the amount of own resources of a CCP to be used in resolution;
  • the Financial Stability Board (FSB) is expected to produce guidance on the use of CCP equity in 2020;
  • consensus has been reached on the delayed enforcement of contractual obligations in resolution. When a CCP enters resolution, the resolution authority should enforce any outstanding contractual obligations set out in the CCP’s operating rules, except if to do so would have adverse effects for financial stability, or on the critical functions of the CCP. The resolution authority then has the right, though not the obligation, to enforce those contractual obligations after resolution if the reason for refraining from their enforcement no longer exits. It is possible to exercise this right for up to 18 months from the time at which the CCP enters resolution, provided that three to six months’ notice is given to the relevant parties; and
  • an article has been added to the draft Regulation on an amendment to facilitate implementation of the FSB’s recommendations for interest rate benchmark reform. The amendment clarifies that contracts which were entered into before the application of clearing and margin requirements to over-the-counter derivative transactions will not become subject to these requirements when those contracts are amended for the purpose of implementing interest rate benchmark reforms.

The letter concludes by requesting scrutiny clearance to vote in favour of the draft Regulation.