The Financial Stability Board ("FSB") requested comments on draft guidance for effective resolution of central counterparties ("CCPs"). The proposed guidance is based on public responses to an August 2016 FSB discussion note on the "essential aspects of CCP resolution planning." The FSB stated that the guidance will be finalized in June 2017 before the G20 Leaders' Summit takes place in July 2017.

The consultative document requested comments on the following aspects of the draft guidance:

  • "the overall objectives of CCP resolution and resolution planning (Section 1)";
  • "the powers that resolution authorities should have to maintain the continuity of critical CCP functions, return the CCP to a matched book and address default and non-default losses (Section 2)";
  • "the potential indicators of circumstances that could lead to a determination to trigger resolution (Section 3)";
  • "the treatment of equity of existing CCP owners in resolution (Section 4)"; and
  • "the application of the 'no creditor worse off' safeguard and determination of the insolvency counterfactual (Section 5)";
  • "the assessment of the adequacy of financial resources in resolution, including elements that the FSB should consider in future work on the quantum of resources for purposes of resolution (Section 6)";
  • "the aspects of resolution planning and resolvability assessments (Sections 7 and 8)"; and
  • "cross-border cooperation and the cross-border enforcement of resolution actions (Sections 9 and 10)."

Comments on the draft guidance must be submitted by March 13, 2017.

Commentary / Bob Zwirb

While it is encouraging that international regulators appear to be concerned about what can go wrong when a significant CCP runs into trouble, the plethora of published discussion papers, consultative documents and guidance addressing this issue to date seem unequal to the task.

One problem with documents like this is that their substance is often couched in language that is general and too discretionary to be of practical value. For example, the FSB Draft Guidance states that when determining whether to place a CCP into resolution, the resolution authority should pursue an amorphous facts-and-circumstances approach; that is, it "should take into account the particular circumstances prevailing at the time of the member default(s) or other stress event and a broad range of factors, including the potential impact of the CCP's recovery actions on the markets served and financial system and potential availability of new resources or options in resolution to support critical functions and maintain financial stability."

Another problem is the lack of transparency. Although it is encouraging that the latest guidance suggests that clearing members "should be able to assess at all times the maximum amount that they may be required to contribute under any . . . cash calls made following a default," it is not clear how this can be reconciled with previous guidance by the FSB, which calls on resolution authorities to undertake planning regarding loss allocation that "provide[s] transparency, if not always predictability," and does "not offer any presumption as to the order in which" various allocation measures will be used. FSB, "Essential Aspects of CCP Resolution Planning," Discussion Note, at p. 20 (Aug. 16, 2016).

A third problem with the draft guidance is that it appears to set up a resolution process that shadows, but often departs from, that of a jurisdiction's insolvency regime. The guidance attempts to reconcile this with a "no creditor worse off safeguard," but it is not clear, at least ex ante, how market participants will fare under this parallel structure. Compounding this problem is the grant of authority in the guidance to resolution entities to override normal property rights and allocate losses to specific stakeholders, including "[i]n specific circumstances . . . to depart from the general principle of equal (pari passu) treatment of creditors within the same class and order of loss allocation in accordance with the CCP's rules and arrangements, if necessary to achieve the resolution objectives or maximize value for all creditors."

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