March 20, 2018

IMF published a working paper that proposes alternative policy suggestions for central counterparty (CCP) resolution. The paper analyzes current resolution tools in the context of policy, which is to restore the critical functions of a failed CCP, and concludes that the toolkit is insufficient to avoid the costs of resolution being borne by taxpayers.

This paper begins by outlining the role, structure, and economics of CCPs. It then describes the function of CCPs and reviews the need for, and content of, recovery and resolution regimes for CCPs. It also assesses the toolkit for resolution of CCPs—that is, the options available when own recovery efforts of a CCP have not succeeded. The paper shows that the classic approach to resolving a bank has little chance of success with a CCP and that the other tools, which are ostensibly for resolution, are effectively forms of recovery. Next, the paper examines the policy thinking behind current proposals and specific resolution tools. It draws conclusions about what would be left in the toolkit, if various efforts at recovery (regardless of how they are categorized in the confused taxonomy applicable to troubled CCPs) fail. Finally, the paper proposes new tools to address this issue and these tools entail:

  • Relaxing the clearing obligation
  • Widening sources of capital and building reserves
  • Scrutinizing failed CCPs to benefit from lessons learned

The paper concludes that many of the tools proposed for resolving CCPs might prove to be unusable in a crisis or even worsen the crisis. Additional tools are needed; some of those would demand that regulators accept that the existing policy belief—in particular, that mandatory clearing must carry on under all circumstances—may not hold valid in a crisis. The draft EU Regulation on this is a valiant legislative attempt to lay more detail around FSB’s outline paper on CCP resolution. The CPMI-IOSCO and FSB should modify their recommendations to dispel the assumption by lawmakers that a resolution model that works for banks will be suitable for CCPs. It is not too late for action to improve policy on failing CCPs.


Related Link: Working Paper (PDF)

Keywords: International, Securities, CCP Resolution, Policy Proposals, Recovery and Resolution, IMF