Global Regulators Back CCP, CSD Recovery Plans

Global regulatory bodies have called for key financial market infrastructures (FMI), such as central counterparties (CCPs) and central securities depositories (CSDs) to develop recovery plans in the event of a future market disaster.

In a report published by the International Organization of Securities Commissions (IOSCO) and the Bank of International Settlements (BIS), it urged systemically-important institutions should be given the necessary tools to enable recovery from potential losses from general business, custody and investment risks.

“An FMI should have tools to replenish any financial resources it may employ in a stress event. These tools may include collecting resources from its participants by means of cash calls and raising additional equity capital,” the report says.

Similarly the Financial Stability Board (FSB) launched a consultation on Thursday seeking to provide guidance for national authorities in implementing recovery and resolutions plans for systemically important insurers. It also identified key attributes of effective resolution regimes for financial institutions. 

“In order to develop resolution strategies, the first important step is to understand what activities of the firm are critical to the real economy and financial stability and, thus, should be maintained in resolution,” says Patrick Montagner, chair of the FSB Cross-Border Crisis Management Group for Insurers.

IOSCO is an umbrella organization of the world’s securities regulators, while the FSB represents the central banks of the G20 countries.

Both play a key role in the G20 plan to end “too big to fail” institutions by placing clearinghouses (CCPs), CSDs and trade repositories at the forefront of the financial system.

Clearers such as Eurex Clearing in Europe, DTCC and CME Clearing in the U.S., ensure a transaction is completed even if one side of a trade goes bust.

However they have equally been concerns that these FMIs could become the next “too big to fail” institutions, and if one runs faces default it could result in another set of bailouts.

The IOSCO report says if FMIs were to face risks without sufficient recovery tools it, “could lead to unanticipated extraordinary one-off or ongoing losses or liquidity shortfalls. The realization of these risks has the potential to result in an FMI’s financial failure.”

It has led to fierce debate on the organization of CCPs and their clearing members, mainly banks, and over who would pay if the CCP had a shortfall of funds to cover a default.

In a white paper issued by JP Morgan earlier this year, it called for clearers to put in place large financial buffers to prevent triggering a future market disaster.