The Financial Stability Board (FSB), the G20 supervisory body, has launched a consultation for public authorities and crisis management groups (CMGs) to evaluate whether existing financial resources and tools are adequate for central counterparties’ (CCPs) resolution.
CCPs have played a major role as systematically important market infrastructure providers while Covid-19 has wreaked havoc on markets. Figures from the International Swaps and Derivatives Association (ISDA) show that cleared interest rate derivatives accounted for 91.2% of the $87.4tn total traded notional in the first quarter. CCPs have activated continuity plans enabling remote working and working from secondary sites to keep the proverbial wheels turning during the pandemic.
However, there is a general concern over systematic risk, underscored in a recently published paper – A Path Forward for CCP Resilience, Recovery, and Resolution. Market participants such as Allianz, Blackrock, Citi, Goldman Sachs, Société Générale, JP Morgan, State Street, T Rowe Price and Vanguard stated that “although regulators had made progress in enhancing a minimum level of CCPs pre-funded resources and setting risk management standards [to protect against default], several gaps in CCP resilience remained.”
They noted that these institutions had become ‘too important to fail’ and highlighted the lack of a market-wide consensus on their recovery and resolution frameworks.
The FSB is recommending five steps to successfully resolve any issues at a CCP in an orderly fashion and without exposing taxpayers to loss. These include identifying hypothetical default and non-default loss scenarios as well as conducting a qualitative as well as quantitative assessment of the existing means to handle an event if it occurs.
Also, on the list is the ability to evaluate the different types of expenses that could arise and pinpointing the potential shortfalls or gaps that need to be filled and the associated costs.
The draft guidance, which is available for feedback until 31 July 2020, is based on the concepts included in a discussion paper the FSB published in 2018. It takes into account the comments received in that earlier public consultation and feedback from the resolution authorities of CCPs.