EBF advisor: Daniele De Gennaro

Publication date: 12 April 2017

EXECUTIVE SUMMARY

The EBF strongly believes that the European Commission proposal provides the basis for standards, as well as national and regional mandates, for recovery and resolution measures in the unlikely event of a default by a central counter party, known as CCP. However, the EBF believes certain clarifications will be essential in order to guarantee a proper functioning of the foreseen system. We hope that co-legislators and supervisory authorities share this view.

In this context, we set out below the key priority issues which we believe the co-legislators should address when discussing the proposal:

• The proposed composition and the potentially large number of stakeholders involved in resolution planning phase would be contrary to the ultimate need for quick decision making to ensure financial stability and avoid a further increase of systemic implications if recovery events occur
• The various recovery and resolution scenarios should reflect the diversity between products, levels of liquidity, type of market participants and trading methods, so to align appropriate recovery and resolution scenarios based on the predictability and possible success of preventing the failure of the CCP
• The basis for a successful recovery and resolution is tailored to the specific CCP according to a range of objective criteria and available tools. What is more, the EBF’s key principle for CCP recovery and resolution is that the burden should be shared between all participants in the chain and must not be unlimited
• A clear distinction between Default Losses and Non-Default Losses for the purpose of the contributions in the recovery and resolution proceedings is strongly needed. In particular, the regulation should clarify that clearing participants shall not contribute, through the waterfall, to losses incurred in a non-default scenario
• It is necessary to involve clearing members in the recovery planning process
• In general, an early intervention by a resolution authority shall be justified only upon condition that the rulebook-led recovery measures are not successful, losses are unsustainable or likely to exhaust the financial resources of the CCP, or extreme market conditions dictate so. The intervention of the resolution authority should be subject to appropriate safeguards, such as ensuring that the adopted resolution scenario properly takes into consideration the interests of all involved stakeholders, all losses are subject to appropriate caps, and the No Creditor Worse Off principle is respected
• A clear framework should be provided which describes in detail how supervisors, in the event of a CCP encountering difficulty, should consult, cooperate and coordinate at international level in order to mitigate financial markets disruptions.