Authorities intervening in central counterparty (CCP) recovery should only do so in certain circumstances according to the CEO of the International Swaps and Derivatives Association (ISDA).
ISDA CEO Scott O’Malia has stated that situations may arise in which resolution bodies, such as the Bank of England (BoE), may need to intervene if recovery measures laid out in the CCP rule book may cause “increased systemic risk or contagion.”
In July, BoE governor Mark Carney stressed the importance of obtaining CCP “resilience, recovery and resolution” at a meeting of the Financial Stability Board (FSB) in Chengdu.
Malia stressed 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. He also called for clarity over point of entry guidelines.
Additionally Malia has insisted that, in the event of an intervention, authorities should follow the rules laid out in the CCP rule book as much as possible alongside rules already proposed in an ISDA framework.
In its existing framework ISDA outlined several loss allocation and position allocation tools to be used during a CCP recovery including limited and pre-defined cash calls and loss-allocation mechanisms in the form of a pro-rata reduction in unpaid payment obligations.
Speaking to Global Custodian’s sister publication The Trade Derivatives earlier this year CME Clearing Europe’s Tina Hasenpusch said that an emphasis on recovery tools as opposed to resolution should be at the forefront of CCP recovery rules.
“Any scenario where a CCP is treated as in default or in resolution where recovery remains an option, will ultimately negatively impact market stability and further aggravate market stress.”
“Where a resolution pre-emptively steps-in during CCP recovery or even the threat of this exists the incentives for market participants to participate actively in the default management and recovery processes will likely be destroyed,” said Hasenpusch.