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February 27, 2019

The FSB Secretary General Dietrich Domanski spoke, at a conference, about the management of central counterparty (CCP) risk. With respect to the CCP reforms, he discussed the work done so far and the work that remains to be done from the perspective of FSB. In terms of the remaining work, he covered areas of policy development as well as the implementation and evaluation of the existing standards. According to him, more work is needed to ensure adequacy of financial resources and treatment of CCP equity in resolution, to complete the adoption of central clearing frameworks, and to understand the effects of reforms on central clearing.

Mr. Domanski highlighted that CCP resolution continues to be a challenging topic, with complex debates around issues such as the use of variation margin gains haircutting, resources and responsibility for non-default losses, and the boundary between recovery and resolution. In November 2018, FSB had published a discussion paper, jointly with CPMI and IOSCO, on financial resources to support CCP resolution and the treatment of equity in CCP resolution. Responses to the public consultation, along with the experience of authorities in evaluating financial resources for resolution, will help inform the development of guidance by the end of 2020. He mentioned that next steps need to be based on the responses received. Mr. Domanski also noted the continued progress toward enhancing the regulatory frameworks for CCPs, including in cross-border aspects such as deference decisions in relation to CCPs, and in setting expectations for their sound design and operations (consistent with PFMI by CPMI and IOSCO). He also emphasized that more work is needed across the FSB membership to implement requirements on recovery and resolution. In Europe, EC, as a member of FSB, and the European Parliamentarians have shown a clear desire to implement the international standards while some other jurisdictions do not yet have in place a comprehensive resolution regime for CCPs.

He added that the Crisis Management Groups (CMGs) are a key component in ensuring that appropriate resolution arrangements are in place, given the cross-border activities of many CCPs. Authorities have begun to establish CMGs for CCPs that have been identified as systemically important in more than one jurisdiction. CMGs and institution-specific cooperation agreements that underpin their operation are not yet in place for all such CCPs and resolution planning for CCPs is still at an early stage. For CCPs that are systemically important in more than one jurisdiction, resolution plans should be developed by the home resolution authority and coordinated within CMG or equivalent arrangements. Rapid progress in implementation is important. A lack of effective and timely implementation of the guidance on CCP resilience, recovery, and resolution would considerably limit the toolkit that supervisors have to address CCP risks.

The evaluation of the effects of reforms is a new, key area of FSB work. One of the first two evaluations under FSB framework was on the incentives to centrally clear derivatives. The evaluation found that including client margins in the leverage ratio creates a disincentive for central clearing. BCBS has been consulting on the question of whether, and how, there is a case for changing the treatment of client margins in the leverage ratio in light of this finding. Furthermore, CCPs will play a role in another evaluation by FSB. This evaluation will examine the effects of too-big-to-fail reforms for banks. Notwithstanding the focus on banks, the evaluation will consider implications for CCPs, keeping in mind that global systemically important banks are the largest clearing members and key nodes in an interconnected financial system. This evaluation should be completed by late 2020. Finally, he discussed the initiative (a priority under Japan’s G20 Presidency in 2019) on exploring the causes and financial stability implications of market fragmentation, along with the possible policy approaches to address possible unintended effects. 


Related Link: Speech (PDF)


Keywords: International, Banking, Securities, CCP, Resolution Planning, Recovery and Resolution, Post Crisis Reforms, CCP Resolution, Too Big to Fail, FSB

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