CPMI and IOSCO Consult on a Paper on CCP Default Management Auctions

By Regulatory News

June 05, 2019

Systemic Risk, Basel III

CPMI and IOSCO published, for public comment, a discussion paper on central counterparty (CCP) default management auctions. The discussion in this paper reflects the current practices at one or more CCPs and identifies the types of factors that one or more CCPs take into account when planning and conducting default management auctions. Additionally, the discussion paper identifies certain considerations that may be useful for CCPs to take into account when planning for auctions. CPMI and IOSCO also published a cover note listing the issues on which inputs are being solicited. The comment period on this discussion paper ends on August 09, 2019.

The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

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Effective Date: June 18, 2019

Press Release

Proposed Rule 1

Proposed Rule 2

Proposed Rule 3

Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

This discussion paper is intended to facilitate the sharing of existing practices and views on default management auctions and to advance industry efforts and foster dialog on the key concepts, processes, and operational aspects used by CCPs in planning and executing effective default management auctions. The effective and smooth management of a participant default is essential to the resilience of a CCP and can help reduce systemic risk. A default management auction is one of the tools that a CCP may use to transfer a defaulting participant’s positions, or subset thereof, to a non-defaulting participant, thus restoring the CCP to a matched book. The paper presents a number of questions and invites comments on the benefits and challenges of various approaches as well as on the potential ways to overcome challenges inherent in default management auctions.

The paper focuses on the following five key aspects of the default management auctions of a CCP:

Governance—The paper discusses the roles and responsibilities of key stakeholders in a CCP’s default management auction. The paper specifies that an effective auction process includes specifying the roles and responsibilities of the auction participants and a CCP’s board of directors, management, and other personnel, who may be involved in the auction process.
Considerations for a successful default management auction—The paper outlines considerations of a successful default management auction and, by contrast, identifies scenarios in which a CCP may determine an auction to be unsuccessful. It also discusses activities that take place before the auction and the potential options available to a CCP in the event of an unsuccessful auction.
Operational considerations—The paper describes the operational issues a CCP considers when planning and executing a default management auction.
Client participation—The paper highlights that a CCP and its clearing members may take into account several considerations when deciding whether to permit or facilitate client participation, including liability of the clearing member, incentives of clients to bid competitively, the level of legal and operational readiness at the client, and the risk of information leakage.
Default of a common participant across multiple CCPs—The paper identifies potential issues inherent when two or more CCPs conduct auctions concurrently, thus creating further operational and/or financial strains on auction participants.

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Comment Due Date: August 09, 2019

Keywords: International, Banking, Securities, CCP, Systemic Risk, Default Management Auction, Governance, CPMI, IOSCO

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