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Recovery and resolution of financial market infrastructures


On 31 July 2012, the Committee on Payment and Settlement Systems (“CPSS”) of the Bank for International Settlements (“BIS”) and the International Organization of Securities Commissions (“IOSCO”) published a joint consultation document on the recovery and resolution of financial market infrastructures (“FMI”s), i.e. systemically important payment systems, central securities depositories, securities settlement systems (“SSSs”), central counterparties (“CCPs”) and trade repositories (“TRs”).

Objectives of the consultation paper

The Financial Stability Board’s “Key Attributes of Effective Resolution Regimes for Financial Institutions” (the “Key Attributes”) requires that FMIs establish resolution regimes appropriate to their critical role in financial markets.  The main purpose of the CPSS-IOSCO consultation paper is to outline the issues that should be considered for different types of FMIs when putting RRP regimes in place in accordance with the Key Attributes and the CPSS-IOSCO “Principles for financial market infrastructures” (the “Principles”).

 Conclusions of the consultation paper

 In summary, the consultation document concludes that:

  • the fundamental aspect of RRP as applied to FMIs is ensuring the continuance of critical operations and services;
  • it is vital that robust arrangements exist for the recovery and resolution of FMIs;
  • the Principles set out a recovery framework for FMIs;
  • regulators will need to ensure that appropriate rules and policies are put in place;
  • In the event of recovery failing, the Key Attributes provide a framework for resolution of FMIs. The methodology for assessing compliance with the Key Attributes, currently being prepared by the Financial Stability Board, will need to contain FMI-specific elements.

 The consultation paper is broken down into five sections:

  • Introduction;
  • Relationship and continuity between the Key Attributes and the Principles;
  • Recovery and resolution approaches for different types of FMI;
  • Important interpretations of the Key Attributes when applied to FMIs; and
  • Cooperation and coordination among relevant authorities.

A summary of the consultation paper is provided in the Schedule below.  The consultation itself is open for comments until 28 September 2012, with further work on this issue is to be published later in 2012.


 1. Introduction

The consultation document makes clear that the fundamental aspect of RRP as applied to FMIs is ensuring the continuance of critical operations and services of the FMI during a financial crisis.

2. Relationship and continuity between the Key Attributes and the Principles

Six areas for avoiding and mitigating systemic risk through strong recovery and resolution capabilities are identified within the consultation document.

2.1 Preventive measures and recovery planning

Authorities should ensure that FMIs develop comprehensive plans that identify:

  • critical operations and services;
  • scenarios that may potentially prevent the FMI from continuing as a going concern, and
  • the strategies and measures necessary to ensure continued provision of critical operations and services should those scenarios occur.

2.2 Oversight and enforcement of preventive measures and recovery plans

Authorities should continually assess the adequacy of an FMI’s recovery plans and, where deficiencies exist, have the power to enforce observance of the Principles.

2.3 Activation and enforcement of recovery plans

Authorities should oversee and have the power to enforce the execution of recovery plans by FMIs, including the power to:

  • issue orders;
  • impose fines or penalties; and
  • force a change of management.

2.4 Beyond recovery

In order to ensure the continuation of critical operations and services, resolution regimes covering FMIs should be specifically incorporated into law due to the fact that traditional bankruptcy procedures do not have the preservation of financial stability as an objective.

2.5 Resolution planning

FMIs should be required to provide authorities with all data and information needed for the purposes of timely resolution planning.

2.6 Cooperation and coordination with other authorities

RRP preparation and implementation should be supported by ex ante and “in the moment” cooperation and coordination amongst authorities.

3. Recovery and resolution approaches for different types of FMI

The consultation document draws a distinction between FMIs that take on credit risk as principal (such as CCPs, SSSs that extend credit, and payment or settlement systems that operate on a deferred net settlement basis and in which the system operator provides performance guarantees), and those that do not (such as TRs).

3.1 FMIs that do not take on credit risk

3.1.1 Recovery

All FMIs should have minimum levels of capital resources as well as recovery plans to manage circumstances in which those reserves prove inadequate.

3.1.2 Resolution

Even where an FMI does not take credit risk, authorities should have the power to:

  • transfer some or all of the FMI’s operations to one or more third parties; and
  • place the FMI into some form of administration, with power to suspend or renegotiate contractual arrangements entered into by the FMI.

3.2 FMIs that take on credit risk

3.2.1 Recovery

A CCP, and any other FMI that faces credit risk, should establish rules that address how credit losses in excess of available financial resources are to be allocated.  Typically, this may be achieved via the application of haircuts to the margin and collateral owing to surviving participants.

3.2.2 Resolution

Where the resolution triggers of an FMI are satisfied, in order to ensure that critical services are protected, the resolution authority should have available to it a broad range of resolution tools relating, inter alia, to:

  • loss allocation;
  • transfers; and
  • stay on termination rights.

Loss allocation

Prior to resolution, the rules of the FMI may impose losses on some participants ahead of equity. Once in resolution, further loss allocation amongst creditors should follow the ranking in insolvency, meaning that equity should typically be written down ahead of debt.  Authorities should also have loss allocation powers which go beyond that contemplated by the rules affecting participants in the FMI, including the power to;

  • haircut margin; or
  • enforce outstanding obligations under the FMI’s rules to replenish default funds or make cash calls.

The above options result in losses being distributed in a different manner.   Enforcing outstanding default fund contributions and cash call obligations is likely to affect clearing members only.   In contrast, margin-haircutting solutions are likely to involve losses falling on the clients of clearing members as well as clearing members due to the fact that, typically, client contracts include provisions for any losses suffered by a clearing member to be passed on to the client.


Resolution authorities will need the power to transfer operations/assets to a third party purchaser/bridge institution.

Stay on Early Termination Rights

Resolution authorities should have the power to impose a stay on exercising termination rights (but not other contractual obligations):

  • against participants of an FMI, as the exercise of early termination rights in these circumstances could prevent the FMI from continuing critical operations and services and/or, in the case of a CCP, result in an  “unmatched book”; or
  • where an FMI is reliant upon services provided by an external third party for continuity of critical services (e.g. IT services).

4. Important interpretations of the Key Attributes when applied to FMIs

When interpreting the Key Attributes in the context of RRP for FMIs, the following should be borne in mind:

  • Deposits (Key Attribute 2):  the protection of depositors will not usually be relevant due to the fact that FMIs typically do not receive deposits;
  • Suspension of payments (Key Attribute 3.2(xi)): the suspension of payments by an FMI is likely to perpetuate or even amplify systemic disruption.  It could result in the full or partial stoppage of the system, possibly defeating the objective of continuity of critical operations and services;
  • Appointment of an administrator to effect an orderly wind-down (Key Attribute 3.2 (ii) and (xii)): the power to conduct an orderly wind-down of a firm may not be a credible resolution strategy for FMIs for which making payments is integral to their critical services;
  • Transfer of critical functions (Key Attribute 3.3):  the ability to transfer the ownership/assets/liabilities of an FMI to a transferee may be of limited value as:
    • there may be few (if any) alternative providers of its critical operations/services; and
    • there may be a number of practical issues that would hinder or prevent any transfer e.g. different participation requirements, IT system incompatibility or legal barriers (such as antitrust or competition laws);
  • Bridge institution (Key Attribute 3.4):  transfer to a bridge institution may be a more attractive option when resolving an FMI in that a bridge institution could more readily ensure continuity and stability while avoiding the legal and operational impediments that may arise with an outright transfer to a third party;
  • Bail-in within resolution (Key Attributes 3.5 and 3.6): unlike banks or investment firms, most FMIs typically do not issue debt securities, limiting the utility of bail-in as a resolution tool;
  • Setoff, netting, collateralisation, segregation of client assets (Key Attribute 4): it is particularly important for an FMI to create legal certainty regarding the legal framework governing setoff rights, contractual netting and collateralisation agreements, and the segregation of client assets;
  • Stays on early termination rights (Key Attributes 4.3 and 4.4): a stay on the termination rights of participants, other counterparties and third party service providers is an important resolution tool with respect to an FMI, particularly a CCP;
  • Safeguards (Key Attribute 5): the principal of “no creditor worse off than in liquidation” continues to apply.  However, with respect to FMIs, this concept should be assessed on the basis of creditor claims as they exist following the FMI’s ex ante rules and procedures for addressing uncovered credit and liquidity needs and the replenishment of financial resources;
  • Funding of FMIs in resolution (Key Attribute 6): Resolution regimes for financial institutions should include cost recovery frameworks so as to minimise taxpayer exposure.  However, for certain types of FMI, participant-based arrangements, such as CCP default arrangements, may be more appropriate.  The provision of temporary funding is possible but should be exceptional and subject to strict conditions that restricts moral hazard and ensures the right to recover any such funding;
  • Resolvability assessments (Key Attribute 10): resolution authorities are expected to regularly undertake resolvability assessments for global systemically important financial institutions.  However, resolvability assessments of an FMI should take into account FMIs’ specific role in the financial system and consider such aspects as:
    • the impact on FMI participants and linked FMIs; and
    • the ability of participants and linked FMIs to retain access to the FMI’s critical operations and services;
  • Recovery and resolution planning (Key Attribute 11):  an FMI should develop and maintain comprehensive plans addressing recovery, orderly wind-down and resolution issues within its governance, risk management and operational arrangements that:
    • identify scenarios that may threaten its ability to continue as a going concern;
    • include a substantive summary of key recovery strategies;
    • identify critical operations and services; and
    • describe measures needed to implement key strategies;
  • Access to information and information-sharing (Key Attribute 12): jurisdictions should ensure that no legal, regulatory or policy impediments exist that hinder the appropriate exchange of information.

5. Cooperation and coordination among relevant authorities

The international nature of many FMIs may mean that several supervisory and resolution authorities have responsibilities for an individual FMI.  Consequently, cooperation and coordination among and between these authorities is necessary in order to ensure that their respective responsibilities can be fulfilled efficiently and effectively at all times.

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