Wednesday, November 30, 2016

EC unveils orderly resolution proposal for central counterparties

By Mark S. Nelson, J.D.

The European Commission proposed rules that would allow for the recovery or resolution of central counterparties. CCPs already face regulation under the European Market Infrastructure Regulation, but those rules do not include provisions for dealing with financially stressed, systemically important CCPs across Europe. The proposal, an outgrowth of the earlier G20 commitment to clear standardized OTC derivatives, now goes to the European Parliament and the EC Council for further approvals.

Under the proposal, CCPs would draft recovery plans and resolution authorities would create resolution plans for a scenario in which a CCP became so financially stressed as to call into question its viability. CCP supervisors would be granted powers to intervene early in the CCP’s affairs via resolution colleges that would include all relevant EU authorities.

According to an FAQ, the resolution authorities may be invoked if a CCP realistically could not be recovered in an appropriate time frame, all other intervention measures have been exhausted, and traditional bankruptcy proceedings could result in prolonged market uncertainties and financial instability. The European Securities and Markets Authority would coordinate the various supervisory authorities and could act as a binding mediator.

Resolution tools would include the ability to sell a business. Another option would involve the use of a bridge CCP structure to enable the sale of a CCP’s essential functions to another firm while liquidating the CCP’s non-essential functions via traditional bankruptcy. Additional options include position and loss allocation tools, and tools for the write-down and conversion of capital/debt instruments or other unsecured liabilities.

The proposal to create recovery and resolution authorities beyond the EMIR includes aspects of the guidance previously issued by the International Organization of Securities Commissions and the Financial Stability Board. The proposal also has similar features to the Bank Recovery and Resolution Directive and could aid financial stability, avoid costs to taxpayers, and prevent the destruction of value. A total of 17 European CCPs clear a significant portion of the €500 trillion in derivatives contracts outstanding globally.