The European Commission (Commission) has proposed a framework for the European Union (EU) of new rules for central counterparty (CCP) recovery and resolution, the purpose of which is to ensure that failure of CCPs can be dealt with effectively to avoid overall risk to the system.
The scale and importance of CCPs in Europe and globally have increased since the post-crisis G20 commitment to clear standardised over-the-counter derivatives through CCPs. A large proportion of the €500tn of derivatives contracts that are outstanding globally are cleared by 17 CCPs across Europe.
Although the European Market Infrastructure Regulation (EMIR) already has regulatory standards in place for EU CCPs, there are no harmonised rules that cover the situation where CCPs face severe distress or failure and therefore need to be recovered or resolved in an orderly manner. As noted in the Fact Sheet released by the Commission, the proposed framework includes rules that would apply EU-wide and would ensure that CCPs and authorities in Europe have the means to act decisively in a crisis and incentivise less risky behavior by market participants as well as CCPs.
The proposal would require:
- CCPs to develop recovery plans with measures to overcome financial distress
- Require recovery plans to be reviewed by the CCP's supervisor
- Require regulatory authorities responsible for resolving CCPs to prepare resolution plans for how CCPs would be restructured and their critical functions maintained in the event of failure
- Require a CCP to be placed in resolution when it is failing or likely to fail, when no private sector alternative can avert failure, and when its failure would jeopardise the public interest and financial stability.
The proposed regulation will be submitted to the European Parliament and the Council of the EU for their approval and adoption.
The Commission Fact Sheet is available on this link.
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