DCO Resolution

Staff Presentation of the CFTC and FDIC

Market Risk Advisory Committee

June 27, 2016
The views expressed during this presentation are solely those of the presenters. The 

information contained herein does not reflect, and cannot be relied upon as evidence 

of, any agency or departmental position. 

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DCO Resolution

• International Agreement Regarding CCP 

Resolution: Key Attributes & FMI Annex

• International Development of CCP Resolution 

Strategies

• U.S. Statutory Framework for DCO Resolution

• FDIC-CFTC Coordination Regarding DCO 

Resolution Planning

• CFTC Regulations to Facilitate DCO Resolution

• DCO Resolution Planning: Unique Issues

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International Agreement Regarding CCP 

Resolution: Key Attributes

• Key Attributes of Effective Resolution Regimes 

for Financial Institutions (“Key Attributes”)

– October 2011

– The Key Attributes set out twelve essential 

features for resolution regimes for all systemically 

significant or critical financial institutions.

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FMI Annex

• Resolution of Financial Market Infrastructures 

(FMIs) and FMI Participants (“FMI Annex”)

– October 2014

– Applies to CCPs

– The FMI Annex contains guidance that 

supplements the Key Attributes by indicating how 

particular Key Attributes, or elements of particular 

Key Attributes, should be interpreted when 

applying to resolution regimes for FMIs

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FMI Annex – Highlights 

• Objectives of FMI resolution: 

– Financial stability and continuity of critical FMI 

functions without exposing taxpayers to loss

– An effective resolution regime for FMIs should:

• Achieve continuity and timely completion of critical 

payment, clearing, settlement and recording functions

• Facilitate the timely settlement of obligations

• Maintain continuous access of participants to collateral 

posted to and held by the FMI that is owed to such 

participants

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FMI Annex – Highlights

• Timing of entry into resolution:

– Recovery measures are exhausted and have failed 

to return the FMI to viability and continuing 

compliance with applicable legal and regulatory 

requirements, or

– Recovery measures are not reasonably likely to 

return the FMI to viability within the timeframe 

required to enable continued compliance with 

applicable legal and regulatory requirements

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FMI Annex – Highlights 

• Powers of resolution authorities:

– Enforce unexhausted contractual obligations of 

participants to meet cash calls or make further 

contributions to a guaranty fund

– Enforce unexhausted obligations of participants to 

accept positions of the defaulting participant

– Write down equity of the FMI

– Reduce the value of any gains payable by the FMI 

to participants (e.g., variation margin haircutting)

– Tear up contracts

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FMI Annex – Highlights 

• Any power to allocate losses by engaging in variation 

margin haircutting must respect the rules of the FMI 

and the hierarchy of claims under the applicable 

insolvency regime.

• Initial Margin Haircutting: Resolution authorities may 

write down initial margin of participants only where 

initial margin is not remote from insolvency, and 

where consistent with the legal framework and the 

FMI’s rules.

– In the US, initial margin is remote from insolvency and 

writing down initial margin is not consistent with the legal 

framework. Therefore, participants’ initial margin for US- based DCOs cannot be written down.

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FMI Annex – Highlights 

• When considering whether to terminate 

outstanding CCP contracts, the resolution 

authority should consider the impact of 

termination on:

– Risk management of the CCP’s participants, and

– Financial stability

• The resolution authority should have the power 

to transfer ownership or critical functions of an 

FMI to a purchaser or bridge institution.

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FMI Annex – Highlights 

• Cooperation, coordination, information sharing

– Crisis Management Groups (CMGs) for FMIs that are 

systemically important in more than one jurisdiction.

• Recovery and resolution planning:

– Ongoing recovery and resolution planning.

– FMI recovery plans should be consistent with PFMIs.

– Resolution authorities should develop resolution 

strategies and operational plans to facilitate effective 

resolution of the FMI.

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FMI Annex – Highlights

• Resolvability assessments

– Systemically important FMIs should be subject to 

regular resolvability assessments.

• Access to information

– FMIs should maintain systems and controls that 

can produce and make available information 

needed for resolution planning and resolution, 

including information on participants, margin 

requirements, status of obligations of participants, 

and links with other FMIs.

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International Development of CCP 

Resolution Strategies

• Cross-Border Crisis Management Group for 

FMIs (fmiCBCM)

– Building on KAs and FMI Annex to develop 

strategies for FMI resolution

– Started work in late 2015 with an industry 

workshop

– CFTC and FDIC participation

– Continued coordination with CPMI-IOSCO 

workstream on CCP resilience and recovery

– Consultations expected in 2016

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U.S. Statutory Framework for DCO 

Resolution

• U.S. Bankruptcy Code

– Chapter 7 (liquidation)

• Title II (Orderly Liquidation Authority) of the 

Dodd-Frank Act, which provides the ability to:

– Create a Bridge Financial Company

– Transfer assets to a bridge

– Provide funding from the Orderly Liquidation Fund

– Enforce contracts, including network rules

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U.S. Statutory Framework for DCO 

Resolution

• DCOs are likely eligible for resolution under the 

Orderly Liquidation Authority as “financial 

companies” under FDIC Regulation 12 CFR §

380.3.

• In addition, Section 210(m) of the Dodd-Frank Act 

(Liquidation of Certain Covered Financial 

Companies or Bridge Financial Companies) refers 

to the liquidation of “member property” under 

subchapter IV of chapter 7 of the Bankruptcy 

Code, a reference to a provision that is applicable 

directly and only to DCOs.

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FDIC – CFTC Coordination Regarding 

DCO Resolution Planning

• FDIC and CFTC Staff have engaged in extensive 

coordination regarding resolution planning for 

DCOs:

– Memorandum of Understanding (2015): information 

sharing in connection with DCO resolution planning.

– Inter-agency resolution exercises on G-SIB and DCO 

resolution.

– Financial Stability Oversight Council (FSOC) working 

groups on various issues pertaining to DCO resolution.

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CFTC Regulations to Facilitate DCO 

Resolution

• Systemically important DCOs (SIDCOs) must 

maintain viable plans for recovery or orderly 

wind-down necessitated by uncovered credit 

losses, liquidity shortfalls, and other types of risk. 

17 CFR § 39.39(b).

• SIDCOs must have procedures for providing the 

CFTC and FDIC with information needed for 

resolution planning. 17 CFR § 39.39(c)(2).

• DCOs have been consulting with stakeholders 

regarding the development of recovery plans and 

proposed rule changes to implement the plans.

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DCO Resolution Planning: 

Unique Issues

• Distinction between recovery and resolution

• Considerations for timing of entry into 

resolution

• Incentives created by resolution strategies

• Differences between DCOs and banks

• Continuity of critical functions of a DCO

• Regulatory coordination

• Information sharing

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