Benoît Coeuré: A cooperative approach to CCP recovery and
resolution
Panel intervention by Mr Benoît Coeuré, Member of the Executive Board of the European Central
Bank, at the ILF Conference on "Resolution in Europe: the unresolved questions", Frankfurt am
Main, 23 April 2018.
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The order of the topics at today's conference on "resolution in Europe" was well planned.
The fact that we are discussing central counterparty (CCP) resolution after discussing bank
resolution echoes the fact that CCP resolution is, by and large, an event that occurs only when
all other safeguards, including bank resolution, have failed.
There are a number of reasons for this.
One is that the ways in which CCPs are set up makes them particularly resilient. CCPs are not
banks, they are (financial market) infrastructures.
They manage the risk of a matched book and rely on the strength of their membership to provide
margin and to share losses if this proves insufficient. Bail-in is integral to CCPs' operational
setup, as clearing members are required to share losses. In this way, their resilience is further
strengthened by banking supervision and recovery and resolution arrangements which help
ensure that clearing members meet their obligations.
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Another reason for CCPs' resilience is the implementation of international standards.
The Principles for Financial Markets Infrastructures of the Committee on Payments and Market
Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO)
have recently benefitted from more granular guidance providing clarity to CCPs and their
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regulators.
This also includes risks other than financial ones. The adoption of the CPMI-IOSCO guidance on
cyber resilience for financial market infrastructures, for example, is an important step towards
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operational resilience.
Yet, while CCP resolution remains a very unlikely event, the disorderly failure of a major CCP
would be disastrous.
Many CCPs are globally systemic, responsible for clearing global markets and with participants
from across the world. This is why the Financial Stability Board (FSB) guidance on central
counterparty resolution, and its focus on planning and cooperation between authorities, is
important.
Cooperation in resolution planning, and co-ordination between recovery and resolution planning,
is essential to ensure that a CCP is always able to continue performing its systemically relevant
functions across all concerned jurisdictions. I will return to this in a minute.
I also welcome the fact that policy discussion is now scrutinising seriously the wisdom of
increased top-down prefunding requirements for CCP resolution. It is doubtful that such
requirements would be effective or proportionate, given the very low probability of CCP resolution
and the marked differences between CCPs' risk profiles.
What is more, increasing funding requirements could discourage the use of CCPs and instead
push counterparties towards riskier and more opaque bilateral clearing. And while I would not
exclude cases where additional financial resources should be available for both recovery and
resolution, ring-fencing resources for resolution only may distort the incentives of all stakeholders
to support a successful recovery.
That said, the resolution authority should have flexibility to determine the optimal choice of
available tools, as well as the best point in time for entry into resolution, as long as the "no
creditor worse off" principle is respected.
It is helpful to assess how further guidance could support authorities in assessing potential
resolution funding needs for individual CCPs, taking into account, for example, the specific risk
characteristics of the products they clear, the types of market they serve and the concentration in
CCP memberships. I fully support work currently under way in the FSB in this respect.
Today, I would like to focus on three key areas where more work is needed.
First, more international cooperation is needed.
Authorities responsible for several major cross-border CCPs have not yet embarked on
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resolution planning and no cross-border crisis management arrangements are yet in place.
This could be because of barriers to sharing confidential information, including different
approaches as to what is considered confidential and what timely. If that is true, then these
barriers need to be removed.
Likewise, authorities may be reticent to engage with others while legislative frameworks are still
evolving. Assessing the cross-border implications of a CCP resolution takes time and
discussions should get under way as soon as possible.
CPMI and IOSCO are conducting some work in this respect.
Second, authorities need to better understand how a CCP resolution might look like.
CCP resolution scenarios cannot be defined in absolute, quantitative terms given the nature of
market events causing resolution. There will always be considerable uncertainty around CCP
resolution and related funding needs.
Nevertheless, further steps should be taken to improve the analytical foundation of CCP
resolution planning and to better prepare authorities.
While the FSB is addressing this issue in its report, I see two steps in particular.
First, CPMI and IOSCO have recently published guidance for supervisory stress testing, which
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includes guidance on how multiple authorities can conduct stress tests.
Testing a CCP's recovery plan by authorities may help to assess the market conditions under
which recovery - and potentially resolution - may be necessary, as well as the potential funding
required. Internationally coordinated stress-testing is essential to foster a better understanding of
the aggregate amount and quality of committed funding that is available across major CCPs.
Co-ordinating CCP and banking stress testing will provide additional understanding on how
resolution plans would work in case of extreme scenarios.
Second, recent analysis of central clearing interdependencies carried out by the standard-setting
committees has revealed the limited number of banking groups that are members of CCPs
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across the world, thereby closely linking CCPs themselves.
Even without stress testing, it is easy to understand that a CCP under stress would send a
liquidity shockwave across its participants and beyond as it requires additional margins and/or
passes on losses. This is especially important for central banks. With stress testing, potential
funding strains can be further explored, and useful information for CCP and bank supervisors as
well as resolution authorities can be gleaned.
Third, European arrangements for CCP recovery and resolution must be coordinated.
The significant interdependencies between CCPs globally are also present in the Single Market.
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Resolution planning should therefore be coordinated across all European Union CCPs.
This is crucial to preserve financial stability within the Union in the event of a crisis.
Critics of EU-wide coordination claim that the fiscal risks of central clearing arise primarily in
CCPs' respective home countries. But given that cross-border membership of EU banks in EU
CCPs is widespread, this argument is flawed.
The losses faced by a CCP during default management and recovery and resolution are mostly
borne by its clearing members, rather than by the CCP itself. Even though a CCP's home
country may choose to provide temporary public funding during resolution, such support would
be recouped from clearing members, in line with their obligations to contribute to comprehensive
loss absorption.
Therefore, fiscal risks would in fact appear to arise in countries in which major CCP participants
are located. Domestic authorities may need to provide these participants with financial support if
they are faced with large payment obligations due to CCP losses.
Thus, EU-wide coordination in resolution planning is necessary to ensure that system-wide risks
are fully identified and mitigated in a fair and effective manner.
At the same time, a resolution is not a discrete event. The boundaries between default
management and recovery and resolution are blurred, so it is important to align responsibilities
and control measures throughout the potential lifecycle of EU CCPs.
The resolution of a CCP relies, to a large extent, on the recovery process. Under the legislative
proposal for a regulation on CCP recovery and resolution, authorities will be required to enforce
CCPs' contractual obligations before using any resolution tools, subject to limited exemptions.
Another aspect to keep in mind is that systemic risk for the Single Market may arise not only from
EU CCPs, but also from non-EU CCPs with substantial activities in the EU. This aspect will
become increasingly important after the United Kingdom's departure from the EU.
Against this background, current efforts to strengthen the EU arrangements for third country
CCPs are very important. In particular, if a third country CCP is systemically important for the
EU, it is not enough to focus on regulatory equivalence alone.
While deference to home country rules and supervisors should be used to the extent possible,
EU authorities also need to have tools for direct liaison with a third country CCP to identify, clarify
and address issues that may pose specific concerns from an EU financial stability perspective.
This is fully in line with the set up in other major jurisdictions.
Similarly, as regards CCP resolution, the development of home country arrangements in line with
international standards must be complemented with the involvement of relevant EU authorities in
resolution planning in line with international standards, to ensure that their systemic risk
concerns are fully taken into account.
To sum up, CCPs are systemically important across border and across the EU. Any recovery
and resolution planning for individual CCPs therefore requires an EU wide systemic risk
assessment and a strong co-ordination at global level.
At EU level, this could involve, for instance, aggregated data collection, joint stress-testing and
crisis simulation exercises, and the closer coordination of related supervisory assessments and
recovery and resolution planning. And given the financial stability, macroprudential and liquidity
issues a CCP resolution raises, central banks must be involved in all aspects of this work.
Thank you.
1
I would like to thank Corinna Freund for her contributions to this speech. I remain solely responsible for the
opinions contained herein.
2
At all times, CCPs are required to hold prefunded, high quality collateral to cover 99% of current and potential
losses that may arise from their participants defaulting. On top of this, they need to hold additional resources to
withstand a range of extreme but plausible stress scenarios. These could include, for instance, the two largest
participants in a major cross-border CCP defaulting. To prepare for situations of even more extreme market
distress, CCPs also need to formulate recovery plans that show how they intend to absorb losses and restore
business viability. See Coeuré, B. (2015), "Ensuring an adequate loss-absorbing capacity of central
counterparties," Remarks at the Federal Reserve Bank of Chicago 2015 Symposium on Central Clearing,
Chicago, 10 April.
3
See CPMI-IOSCO (2017), "Recovery of financial market infrastructures - Revised report", July.
4
See CPMI-IOSCO (2016), "Guidance on cyber resilience for financial market infrastructures", June. The
Eurosystem recently established the Euro Cyber Resilience Board (ECRB) for pan-European Financial
Infrastructures, which will help raise awareness and provide a platform for discussing issues related to
cybersecurity. See Coeuré, B. (2018), "A Euro Cyber Resilience Board for pan-European Financial
Infrastructures", introductory remarks at the first meeting of the ECRB, Frankfurt, 9 March.
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Under the FSB Key Attributes of Effective Resolution Regimes, FSB members have committed to establish
crisis management groups for CCPs that are systemically important in more than one jurisdiction.
6
See CPMI-IOSCO (2018), "Framework for supervisory stress testing of central counterparties (CCPs)", April.
7
See BCBS, CPMI, FSB and IOSCO (2017), "Analysis of central clearing interdependencies", 5 July.
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See also ECB (2017), Opinion of the European Central Bank on a proposal for a regulation of the European
Parliament and of the Council on a framework for the recovery and resolution of central counterparties and
amending Regulations (EU) No 1095/2010, (EU) No 648/2012, and (EU) 2015/2365 (CON/2017/38), 20
September.