Catalyst Supports New Guidance for CCP Recovery Plans

Following the recent report from the International Organization of Securities Commissions (IOSCO) and the Bank of International Settlements (BIS) calling for recovery plans for financial market infrastructures, consultancy Catalyst has called for swift implantation of the guidance in order to ensure market stability.

The guidance is “a clear move to prevent disorderly failure and avoid severe systemic disruptions through a comprehensive and effective recovery plan,” says Catalyst, adding that many market participants would welcome stronger action.

Following the financial crisis, central counterparties (CCPs) have taken on a larger scale in order to support the OTC markets.

Damon Batten, OTC derivative reform and regulatory expert at Catalyst, says that this new role has greatly increased the “complexity of risks they manage, transforming many CCPs into a new class of systemically important institution. Even so, CCPs are no panacea. A handful of CCP failures have occurred over the past 40 years. Within the last five years there have been a small number of incidences of a CCP needing to use its Default Fund, including one recent incident arising from a trading error (at the Korea Exchange)…Arguably, the assumption of the complex risks associated with OTC markets will increase the risk of CCP failures, which in turn means that CCPs must increase their own risk frameworks.”

The BIS-IOSCO rules may not go as far as some of those proposed by industry participants, such as J.P. Morgan suggesting a recapitalization fund for CCPs, but overall, Catalyst thinks the new guidance will be welcomed by CCP users.

“If CCPs actively align themselves with the guidance and consider the broad reach of any recovery plan over various risk categories and failure scenarios, they should be able to manage users’ concerns, demonstrate their commitment to maintaining best in class infrastructure and as a result, enhance the stability and resilience of global financial markets,” says Lifan Zhang, market risk expert at Catalyst.