LONDON, Feb 7 (IFR) - The World Federation of Exchanges has
urged lawmakers to ensure that authorities tasked with the
orderly wind-down of failed clearinghouses only invoke
resolution proceedings as a last resort.
The industry association, which represents over 200 market
infrastructure providers including more than 100 central
counterparties and central securities depositories, noted in a
white paper on the interplay between CCP recovery and resolution
that cross-border cooperation is vital to ensure orderly markets
and has called for regional and national authorities to align as
closely as possible to international standards.
The point at which a failing CCP's own recovery efforts turn
into a resolution situation has become a point of intense
debate, stoked by a recent consultative document from the
Financial Stability Board and draft legislation from the
European Commission published late last year.
EC proposals deliberately lacked prescriptive detail over
the point at which authorities can step into a CCP recovery and
invoke resolution proceedings. The broad language reflects an
attempt to prevent market participants from exacerbating a
stress scenario by taking action that would make the CCP's
The WFE paper, which reflects a consensus view of the
exchange industry, calls for greater clarity over the inflexion
point and warns that resolution proceedings should only be
invoked once all recovery measures, as defined in the CCP's
rulebook, have been exhausted, or if ongoing execution of the
recovery plan would create systemic stress in broader financial
"While acknowledging the need for clear resolution plans,
there needs to be clarity as to when they should be invoked.
There also needs to be flexibility as to how resolution plans
are executed in the interests of the wider markets and
stakeholders," said Nandini Sukumar, CEO of the WFE.
The trade body notes that resolution authorities should only
step in where it is clear that recovery is not, or will not be
successful. The relevant resolution procedures should be defined
in advance and established under relevant law or regulation, the
"The uncertainty as to whether, when and to what extent an
earlier intervention may take place will inevitably inject yet
more uncertainty into an already complex situation," the white
According to the WFE, a CCP placed into resolution too early
would thwart a successful market-driven recovery and create
inefficiencies in the market, leading to imbalanced losses among
users. Similarly, a CCP placed into resolution too late could
reduce the effectiveness of resolution actions as financial
resources could be consumed by a failed recovery situation.
In addition, the WFE warns that member incentives to ensure
the success of recovery tools could be damaged by an incorrect
determination of the point of resolution, as members could be
incentivised to embark on actions that could trigger a
"We therefore consider it vital to strike the right balance
between providing sufficient certainty to participants
(including the CCP) and leaving the authorities with enough
flexibility - bearing in mind the significant risks which would
be created by early entry - to make the correct decision to
preserve and protect market stability," the WFE paper says.
CCPs have become focal points of risk as a result of new
rules that have pushed around 60% of the US$544trn
over-the-counter derivatives market into central clearing. WFE
has supported initiatives by CPMI-IOSCO and the FSB to create
international standards for CCP risk management.
In a call for greater cross-border cooperation arrangements,
the WFE also supports simulated exercises to be performed by
relevant authorities to ensure fast action and decision making
in a live market event.
It also notes that the resolution of a CCP should be led by
the resolution authority of the jurisdiction in which the CCP is
established, and done in close consultation with the home
supervisory and prudential regulators to ensure appropriate
information and decision making.
The WFE intends to respond separately to the FSB
consultation before the March 13 deadline.
"We are encouraged by the ongoing alignment and consistency
of international standards between key market stakeholders,"
said Gavin Hill, head of regulatory affairs at the WFE. "The WFE
will sustain its global advocacy mandate on post-trade issues to
ensure the perspectives of the exchange and CCP sector continue
to be heard."
(Reporting by Helen Bartholomew; Editing by Ian Edmondson)