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ISDA on CCPs: recovery before resolution

On 26 January 2015, ISDA published a position paper on CCP Default Management, Recovery and Continuity: A Proposed Recovery Framework.

The proposed framework reiterates the preference for recovery over resolution. Typically, a recovery is led by the CCP itself, while a resolution must be orchestrated by the relevant resolution authority. If the CCP successfully handles its default management process, the resolution authority would not have to step in.

The framework is consistent with the October 2014 CPMI-IOSCO Recovery of financial market infrastructures, which itself provided supplemental guidance on the requirement to have a comprehensive and effective recovery plan set out in the April 2012 CPSS[1]-IOSCO Principles for financial market infrastructure. However, ISDA focuses on losses caused by a clearing member default and the tools to re-establish a matched book. It is not concerned with other sources of losses discussed by CPMI-IOSCO, such as losses related to liquidity shortfalls or those not caused by a clearing member default more generally.

The framework proposed by ISDA goes further than its Principles for CCP Recovery published recently (discussed in this blog post), as it delves into unprecedented details of the recovery measures and their restrictions, implying that no CCP rule book may be left intact.

The prospect of a CCP failure may be the new “winter is coming” archetype, and as such is set to receive heightened regulatory attention.  In particular, the EU Commission Work Programme 2015 reveals that “the regulatory framework will be further strengthened by a proposal on crisis management and resolution of systemic non-banking entities” (read CCPs), while the US regulators envisions similar steps.

In this context, the CCPs may not consider amending their rule books just yet.

[1] The Committee on Payment and Settlement Systems (CPSS) was renamed the Committee on Payment and Market Infrastructures (CPMI) in September 2014

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