Mar 10, 2020

 
A Path Forward for CCP Resilience, Recovery and Resolution

Major buy-side and sell-side firms call for regulatory action to make clearing houses safer and propose a step-change in how the market deals with clearing house failure

Updated March 10, 2020

New York — Today, ABN AMRO Clearing, Barclays, Deutsche Bank, Commonwealth Bank of Australia, Franklin Templeton, Guardian Life, Ivy Investments, Nordea, TIAA and UBS endorsed and joined as signatories a joint buy- and sell-side paper calling for regulatory action to make clearinghouses safer. The paper – entitled a “A Path Forward for CCP Resilience, Recovery and Resolution” – was originally published and backed at a firm-wide level in October 2019 by Allianz, BlackRock, Citi, Goldman Sachs, JPMorgan Chase & Co., Societe Generale, State Street, T. Rowe Price, and Vanguard. The signatories collectively appreciate the attention the recommendations are receiving from global regulators and welcome the continued engagement with the clearinghouses.

Since the financial crisis, clearinghouses have been increasingly relied upon to protect market participants from counterparty losses when faced with major market shocks. In endorsing this paper, the new signatory firms join the original co-authors in showing their support for the further enhancement of the safety and soundness of CCPs. The recommendations, which represent the institutional views of signatory firms, intend to better align incentives between clearinghouses and market participants, and ensure that clearing member and end-user liabilities are manageable.

The growing support for the paper across the financial services industry reflects the depth of convictions towards the important issues raised, and the paper itself is intended as a genuine path forward to protect financial stability and the market’s resilience in the event of a significant disruption.

“The recommendations help to align the incentives of clients, clearing members and CCPs and to strengthen financial markets stability,” said Gert Ellerkmann, Global Risk Governance & Strategy Specialist at ABN AMRO Clearing Bank.

“Central clearing has made the derivatives market more stable, but it has also increased dependence on central clearing counterparties and created a concentration of risk. Taking additional steps to ensure that risk is well managed is beneficial to all parties and the market as a whole,” said Atanas Goranov, Derivatives Risk Officer at The Guardian Life Insurance Company of America.

“We look forward to joining this important joint sell side and buy side initiative to improve CCP resilience, with the goal to enhance financial stability during times of market disruption,” said Andrew Whiteley, Head of Funds Risk at Barclays.

“The whitepaper lays out a comprehensive set of recommendations to better align incentives and strengthen the CCP framework so that the resiliency of this important market function can be further enhanced. We are pleased that such a diverse set of market participants have come together to support the paper and we look forward to the next phase of advocacy on this initiative,” said Jonathan Siegel, Vice President & Senior Legal Counsel at T. Rowe Price.

Original announcement issued on October 24, 2019

New York — BlackRock, Goldman Sachs, JPMorgan Chase & Co., Allianz, Citi, Societe Generale, State Street, T. Rowe Price, and Vanguard, today, in a joint paper, presented detailed recommendations from both buy-side and sell-side perspectives to further enhance the safety and soundness of central counterparties (CCPs), also known as clearing houses. Since the financial crisis, CCPs have been increasingly relied upon to protect market participants from counterparty losses when faced with major market shocks but, despite enhancements in the past few years, the firms believe that there remain outstanding issues relating to CCP resilience, recovery and resolution that require further action.

In the spirit of ensuring on-going financial stability in times of market disruption or crisis, the paper seeks to better align incentives between CCPs and market participants, and ensure that clearing member and end-user liabilities are limited and manageable. Our recommendations address key elements of resilience, recovery, and resolution of a CCP and include:

On Resilience

  • ensuring that CCPs are subject to appropriate risk management standards and have sufficient financial resources in place to reduce the likelihood of ever needing to enter a recovery or a resolution process
  • requiring CCPs to make material contributions of their own capital to the default waterfall in two separate tranches

On Recovery

  • introduction of a clearing member ballot to support CCP recovery
  • compensation to be provided to clearing members and end-users for losses incurred through recovery or resolution tools
  • pre-defined assessment rights capped at one times each clearing member’s default fund contribution

On Resolution

  • require CCPs to set aside ex ante resources (e.g., issuance of long term debt that could be bailed in) for recapitalization
  • regular reviews of CCP rulebooks to be conducted by resolution authorities in conjunction with CCP primary regulators and systemic risk regulators to ensure a common understanding of CCP risk

“Together, these recommendations form a path forward to aligning incentives and enhancing financial stability through even stronger CCPs,” said Nicolas Friedman, Global Co-Head of Counterparty Risk at Goldman Sachs.

“Together, our recommendations will help ensure that CCPs are optimally structured to make sure the market remains resilient in the unlikely event of a meaningful disruption,” said Eileen Kiely, Deputy Head of Counterparty and Concentration Risk at BlackRock.

“Our recommendations would help ensure that clearing members’ and end-users’ exposures to the CCP are limited, ascertainable and manageable,” said Marnie Rosenberg, Global Head of Clearing House Risk & Strategy at JPMorgan Chase & Co.

“While central clearing has mitigated many risks, market resiliency can be enhanced by additional protections to strengthen margin calculations and default fund components, and to preserve the assets of non-defaulting market participants,” said William Thum, Global Head of Capital Markets Legal and Regulatory at Vanguard.

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