FSB consults on guidance on assessing the adequacy of financial resources for CCP resolution

May 4, 2020FSB published a public consultation on guidance on financial resources to support central counterparty (CCP) resolution and on the treatment of CCP equity in resolution. Central clearing of standardized over-the-counter (OTC) derivatives is a key pillar of G20 Leaders’ commitment to reform OTC derivatives markets following the 2008 financial crisis.

Increased central clearing has simplified previously complex and opaque web of derivatives exposures, more collateral is in place to reduce counterparty credit risks. CCPs’ criticality to overall safety and soundness of the financial system means authorities must take steps to ensure CCPs do not themselves become a source of systemic risk. Must ensure they can be successfully resolved without exposing taxpayers to loss.

Draft Guidance
Draft guidance based on concepts included in the FSB discussion paper published in 2018.

Part I of guidance proposes five steps to guide the authorities in assessing the adequacy of a CCP’s financial resources and potential financial stability implications of their use. Identify hypothetical default, non-default loss scenarios leading to CCP resolution. Authorities should conduct a qualitative, quantitative evaluation of existing resources and tools available in the resolution of the CCP, then assess potential resolution costs. Next, compare existing resources and tools to resolution costs and identify any gaps. Lastly, evaluate availability, costs, benefits of potential ways to address any gaps.

Part II addresses the treatment of CCP equity in resolution provides a framework for resolution authorities to evaluate the exposure of CCP equity to losses in recovery. It also provides a framework to evaluate the exposure of CCP equity to losses in liquidation and resolution and how the treatment of CCP equity in resolution could be adjusted.

Responses are welcomed to the questions in the consultation report by July 31, 2020.

For more information, visit www.fsb.org

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