Benoît Cœuré of ECB Speaks on a Cooperative Approach to CCP Resolution

However, the resolution authority should have flexibility to determine the optimal choice of available tools, as well as the best point in time for entry into resolution, as long as the “no creditor worse off” principle is respected. He also stressed that it is beneficial to assess how further guidance could support authorities in assessing potential resolution funding needs for individual CCPs, taking into account, for example, the specific risk characteristics of the products they clear, the types of market they serve, and the concentration in CCP memberships. He said that he fully supports the work under way in FSB in this area, before moving on to discuss the three key areas where more work is needed:

• Enhanced international cooperation. Authorities responsible for several major cross-border CCPs have not yet started working on resolution planning and no cross-border crisis management arrangements are yet in place. This could be because of barriers to sharing confidential information or reticence to engage with others while legislative frameworks are still evolving. In this context, discussions should get under way as soon as possible, although CPMI and IOSCO are conducting some work in this respect.

• Improved understanding of CCP resolution. He discussed the FSB work in this area and highlighted that further steps should be taken to improve the analytical foundation of CCP resolution planning and to better prepare authorities. Referring to the CPMI and IOSCO recently published guidance for supervisory stress testing, he added that testing the recovery plan of a CCP by authorities may help in this regard. Furthermore, coordinating CCP and banking stress testing will provide additional understanding on how resolution plans would work in case of extreme scenarios. With stress testing, potential funding strains can be further explored and useful information for CCP and bank supervisors as well as resolution authorities can be gleaned.

• Better coordination of resolution and recovery arrangements in the Single Market. Under the legislative proposal for a regulation on CCP recovery and resolution, authorities will be required to enforce CCPs’ contractual obligations before using any resolution tools, subject to limited exemptions. Another aspect to keep in mind is that systemic risk for the Single Market may arise not only from EU CCPs, but also from non-EU CCPs with substantial activities in the EU. This aspect will become increasingly important after Brexit. Thus, the current efforts to strengthen the EU arrangements for third-country CCPs are very important. Particularly, if a third-country CCP is systemically important for EU, it is not enough to focus on regulatory equivalence alone.

He concluded that CCPs are systemically important across border and across the EU. Therefore, any recovery and resolution planning for individual CCPs requires an EU-wide systemic risk assessment and a strong coordination at the global level. However, at the EU level, this could involve, for instance, aggregated data collection, joint stress-testing, and crisis simulation exercises, along with the closer coordination of related supervisory assessments and recovery and resolution planning. Given the financial stability, macro-prudential, and liquidity issues a CCP resolution raises, central banks must be involved in all aspects of this work.

Related Link: Speech

Keywords: Europe, EU, PMI, Banking, Securities, CCPs, Recovery and Resolution, Brexit, ECB