FSB publishes research on CCP recovery and resolution
11 March 2022 Global
Image: AdobeStock/piotrurakau
The Financial Stability Board (FSB) has published a report, in collaboration with the Committee on Payments and Markets Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO), which confirms the need for further work on central counterparty resources for recovery and resolution.
The project has grown from a decision by the three organisations in November 2020 to conduct collaborative research on whether CCPs have adequate financial resources and tools for recovery and resolution.
This report summarises the results of data gathering and analysis conducted in 2021.
One component of this research focused on a sample group of CCPs that are systematically important in more than one jurisdiction, evaluating the capacity of these CCPs to absorb losses under a range of default loss and non-default loss scenarios.
Under the default loss scenarios, all 15 CCPs in the sample were found to be able to absorb all losses. Approximately half of these CCPs needed to use recovery tools, but none required resolution.
For non-default loss scenarios, the report found that, in the case of a cyber threat scenario, the resolution authorities would have needed to trigger resolution for the majority of CCPs in the sample to generate sufficient resources to cover the loss.
In another non-default situation, one CCP was found to have inadequate liquid resources and liquidity coverage to withstand the shock.
A second part of the research evaluated the performance and financial stability implications of tools covered by the existing CPMI-IOSCO and FSB guidance, defined in the CPMI-IOSCO Guidance on Recovery of Financial Market Infrastructures and FSB Guidance on CCP Resolution.
A quantitative evaluation of these tools found that use of cash calls and variation margin gains haircutting had limited impact on the liquidity and solvency of clearing members.
This was supplemented by qualitative analysis of the impact of different recovery and resolution tools on the wider financial system, on performance risk, and on market and public confidence.
The FSB indicates that it plans to conduct cost-benefit analysis on a wider range of alternative financial tools for CCP resolution, which will begin in Q2 2022 and will be executed in association with CPMI-IOSCO.
Alongside this, it will continue to monitor whether resolution authorities have access to an adequate set of resolution tools and resources.
The FSB has invited public comment on these findings, which should be submitted by 29 April 2022.
The project has grown from a decision by the three organisations in November 2020 to conduct collaborative research on whether CCPs have adequate financial resources and tools for recovery and resolution.
This report summarises the results of data gathering and analysis conducted in 2021.
One component of this research focused on a sample group of CCPs that are systematically important in more than one jurisdiction, evaluating the capacity of these CCPs to absorb losses under a range of default loss and non-default loss scenarios.
Under the default loss scenarios, all 15 CCPs in the sample were found to be able to absorb all losses. Approximately half of these CCPs needed to use recovery tools, but none required resolution.
For non-default loss scenarios, the report found that, in the case of a cyber threat scenario, the resolution authorities would have needed to trigger resolution for the majority of CCPs in the sample to generate sufficient resources to cover the loss.
In another non-default situation, one CCP was found to have inadequate liquid resources and liquidity coverage to withstand the shock.
A second part of the research evaluated the performance and financial stability implications of tools covered by the existing CPMI-IOSCO and FSB guidance, defined in the CPMI-IOSCO Guidance on Recovery of Financial Market Infrastructures and FSB Guidance on CCP Resolution.
A quantitative evaluation of these tools found that use of cash calls and variation margin gains haircutting had limited impact on the liquidity and solvency of clearing members.
This was supplemented by qualitative analysis of the impact of different recovery and resolution tools on the wider financial system, on performance risk, and on market and public confidence.
The FSB indicates that it plans to conduct cost-benefit analysis on a wider range of alternative financial tools for CCP resolution, which will begin in Q2 2022 and will be executed in association with CPMI-IOSCO.
Alongside this, it will continue to monitor whether resolution authorities have access to an adequate set of resolution tools and resources.
The FSB has invited public comment on these findings, which should be submitted by 29 April 2022.
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