Global regulatory bodies have identified several concerns with the risk and resolution models at clearing houses in a new report, as they look to shore up the systemically important market infrastructures.
The joint report from the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions (CPMI-IOSCO) concluded while central counterparties (CCPs) have made important progress in implementing standards, there are still a number of issues around stress testing, liquidity risk management, and recovery planning.
The report is based on a survey of 10 clearing houses, which included ASX Clear, CME Clearing, Eurex Clearing, SwapClear and ICE Clear Credit, among others. The findings and feedback of the report will be used to complete a regulatory agenda for CCPs.
“Although the risk of default cannot be entirely eliminated from the global financial system, we aim to limit potential systemic risks arising from any default by a central counterparty member as much as possible by applying a robust but balanced approach to reinforce financial buffers and risk control,” said IOSCO board chair Ashley Alder.
The report suggested recovery plans across the board have been relatively slow, with only a small number of CCPs completing their recovery plans by the date of the review.
“For most CCPs recovery planning is a fairly new and challenging exercise and experiences continue to evolve. Even among those CCPs that had detailed plans, relatively few considered their plans to be fully consistent with the PFMI (Principles for Financial Markets Infrastructure),” the report states.
Clearing houses and international trade bodies have stressed that regulatory intervention in CCP recovery should be limited.
Scott O’Malia, CEO of the International Swaps and Derivatives Association (ISDA) stated in an online blog that strict conditions in which an intervention should take place by proposing that recovery should be CCP-led as far as possible with pointers for an intervention being clearly defined upfront.
IOSCO bemoans lack of CCP recovery plan
The report highlights several issues around stress testing and recovery management for CCPs.