EU strikes deal on clearing houses recovery and resolution plans
25 June 2020 Brussels
Image: symbiot/Shutterstock.com
The Presidency of the Council and the European Parliament have reached a deal on a common set of rules for central counterparties (CCPs) and their authorities to prepare for and deal with financial difficulties.
The proposed rules aim at providing national authorities with resources to manage crises and to handle situations involving failures of key financial market infrastructures.
The European Council said they build on the same principles as the recovery and resolution framework applying to banks.
The main objectives of the reform include reducing the probability of CCP failure by introducing effective incentives for proper risk management and in case a financial difficulty would effectively arise, to preserve CCPs' critical functions, to maintain financial stability, and to prevent taxpayers from bearing the costs associated with their restructuring or resolution.
According to the European Council, the new rules take into account the global and systemic nature of CCPs.
The council explained that the rules provide for close coordination between national authorities in the framework in order to ensure that resolution actions are applied in a coherent manner taking into consideration the impact on affected stakeholders and financial stability.
The new framework is set to take effect 18 months after the date of entry into force of the regulation.
The current COVID-19 pandemic was also taken into consideration, with the co-legislators agreeing to give one additional year for trading venues and CCPs offering trading and clearing of exchange-traded derivatives to start applying open access rules in the Markets in Financial Instruments Regulation.
The open access regime will only start applying as of 4 July 2021.
The council stated that the recovery and solution will be based on a three-step approach:
- First, the prevention and preparation whereby CCPs and resolution authorities will be required to draw up recovery and resolution plans on how to handle any form of financial distress which would exceed CCPs existing resources. It noted that if resolution authorities identify obstacles to resolvability in the course of the planning process, they can require a CCP to take appropriate measures.
- The second, CCPs can take recovery measures, according to certain viability indicators and based on the prepared recovery plan. The European Council stated that these include cash calls to non-defaulting clearing members, the reduction in value of the collateral provided daily to the CCP and the use of the CCP's own resources. Additionally, supervisory authorities will have the possibility to intervene at an early stage, i.e. before the problems become critical and the financial situation deteriorates irreparably.
- Lastly, in the unlikely case of a CCP failure, national authorities will have the possibility to resort to resolution tools. According to the council, these include the termination of the CCP's contracts, variation margin gains haircutting, the write-down of CCP capital, a cash-call to clearing members, the sale of the CCP or parts of its business or the creation of a bridge CCP. In certain limited cases, extraordinary public support may be provided as a last resort, the purpose of resolution actions is to minimise the extent to which the cost of a CCP's failure is borne by taxpayers, while ensuring that shareholders bear an appropriate part of the losses and that taxpayer funds are recouped to the extent possible.
Commenting on the deal, Zdravko Maric, Deputy Prime Minister and Minister of finance of Croatia, said: “The current context, characterised by important volatility and uncertainty, reminds us of the vital function clearing houses play to make our financial markets safer. By putting EU rules in place to deal with their potential failure, we are adding an essential piece of legislation to secure confidence in our financial system.”
Following finalisation of technical work, the European Council said the text will be submitted to EU ambassadors for endorsement with a view to reaching an agreement in the form of a (pre-negotiated) council position at first reading. It will then undergo a legal linguistic revision.
Parliament and Council will be invited to adopt the proposed regulation pursuant to Article 294(7) TFEU.
The proposed rules aim at providing national authorities with resources to manage crises and to handle situations involving failures of key financial market infrastructures.
The European Council said they build on the same principles as the recovery and resolution framework applying to banks.
The main objectives of the reform include reducing the probability of CCP failure by introducing effective incentives for proper risk management and in case a financial difficulty would effectively arise, to preserve CCPs' critical functions, to maintain financial stability, and to prevent taxpayers from bearing the costs associated with their restructuring or resolution.
According to the European Council, the new rules take into account the global and systemic nature of CCPs.
The council explained that the rules provide for close coordination between national authorities in the framework in order to ensure that resolution actions are applied in a coherent manner taking into consideration the impact on affected stakeholders and financial stability.
The new framework is set to take effect 18 months after the date of entry into force of the regulation.
The current COVID-19 pandemic was also taken into consideration, with the co-legislators agreeing to give one additional year for trading venues and CCPs offering trading and clearing of exchange-traded derivatives to start applying open access rules in the Markets in Financial Instruments Regulation.
The open access regime will only start applying as of 4 July 2021.
The council stated that the recovery and solution will be based on a three-step approach:
- First, the prevention and preparation whereby CCPs and resolution authorities will be required to draw up recovery and resolution plans on how to handle any form of financial distress which would exceed CCPs existing resources. It noted that if resolution authorities identify obstacles to resolvability in the course of the planning process, they can require a CCP to take appropriate measures.
- The second, CCPs can take recovery measures, according to certain viability indicators and based on the prepared recovery plan. The European Council stated that these include cash calls to non-defaulting clearing members, the reduction in value of the collateral provided daily to the CCP and the use of the CCP's own resources. Additionally, supervisory authorities will have the possibility to intervene at an early stage, i.e. before the problems become critical and the financial situation deteriorates irreparably.
- Lastly, in the unlikely case of a CCP failure, national authorities will have the possibility to resort to resolution tools. According to the council, these include the termination of the CCP's contracts, variation margin gains haircutting, the write-down of CCP capital, a cash-call to clearing members, the sale of the CCP or parts of its business or the creation of a bridge CCP. In certain limited cases, extraordinary public support may be provided as a last resort, the purpose of resolution actions is to minimise the extent to which the cost of a CCP's failure is borne by taxpayers, while ensuring that shareholders bear an appropriate part of the losses and that taxpayer funds are recouped to the extent possible.
Commenting on the deal, Zdravko Maric, Deputy Prime Minister and Minister of finance of Croatia, said: “The current context, characterised by important volatility and uncertainty, reminds us of the vital function clearing houses play to make our financial markets safer. By putting EU rules in place to deal with their potential failure, we are adding an essential piece of legislation to secure confidence in our financial system.”
Following finalisation of technical work, the European Council said the text will be submitted to EU ambassadors for endorsement with a view to reaching an agreement in the form of a (pre-negotiated) council position at first reading. It will then undergo a legal linguistic revision.
Parliament and Council will be invited to adopt the proposed regulation pursuant to Article 294(7) TFEU.
← Previous regulation article
UK’s exclusion of CSDR’s settlement discipline regime set to create new challenges
UK’s exclusion of CSDR’s settlement discipline regime set to create new challenges
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
