POSITION (EU) No 15/2020 OF THE COUNCIL AT FIRST READING

with a view to the adoption of 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, (EU) No 600/2014, (EU) No 806/2014 and (EU) 2015/2365 and Directives 2002/47/EC, 2004/25/EC, 2007/36/EC, 2014/59/EU and (EU) 2017/1132

Adopted by the Council on 17 November 2020

(Text with EEA relevance)

(2020/C 426/01)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national Parliaments,

Having regard to the opinion of the European Economic and Social Committee, (1)

Having regard to the opinion of the European Central Bank, (2)

Acting in accordance with the ordinary legislative procedure, (3)

Whereas:

(1) Financial markets are pivotal for the functioning of modern economies. The more integrated they are, the greater the potential for efficient allocation of economic resources will be, potentially benefitting economic performance. However, in order to improve the functioning of the single market in financial services, it is important to have procedures in place to deal with effects of market turmoil and to ensure that if a financial institution or a financial market infrastructure that is active in this market faces financial distress or is at the point of failure, such an event does not destabilise the entire financial market and damage growth across the wider economy.

(2) Central counterparties (CCPs) are key components of global financial markets, stepping in between participants to act as the buyer to every seller and the seller to every buyer, and playing a central role in processing financial transactions and managing exposures to diverse risks inherent in those transactions. CCPs centralise the handling of transactions and positions of counterparties, honour the obligations created by the transactions, and require adequate collateral from their members as margin and as contributions to default funds.

(3) The integration of Union financial markets has resulted in CCPs evolving from primarily serving domestic needs and markets to constituting critical nodes in Union financial markets more widely. CCPs authorised in the Union today clear several product classes, including listed and over‐the‐counter (OTC) financial and commodity derivatives, cash equities, bonds and other products such as repos. They provide services across national borders to a broad range of financial and other institutions across the Union. While some CCPs remain focused on domestic markets, they are all systemically important at least in their home markets.

(4) As a significant amount of the financial risk of the Union financial system is processed by and concentrated in CCPs on behalf of clearing members and their clients, effective regulation and robust supervision of CCPs are essential. Regulation (EU) No 648/2012 of the European Parliament and of the Council (4) requires CCPs authorised in the Union to observe high prudential, organisational and conduct of business standards. Competent authorities, working together within supervisory colleges which group together relevant authorities for the specific tasks allocated to them, are tasked with the full oversight of the activities of CCPs. In accordance with commitments entered into by G20 leaders since the 2008 financial crisis, Regulation (EU) No 648/2012 also requires standardised OTC derivatives to be centrally cleared by a CCP. As the obligation to centrally clear OTC derivatives comes into effect, the volume and range of business done by CCPs is likely to increase which could, in turn, provide additional challenges for risk management strategies of CCPs.

(5) Regulation (EU) No 648/2012 has contributed to the increased resilience of CCPs and of wider financial markets against the broad range of risks processed and concentrated in CCPs. However, no system of rules and practices can prevent existing resources from being inadequate in managing the risks incurred by a CCP, including one or more defaults by clearing members. Faced with a scenario of severe financial distress or impending failure, financial institutions should in principle remain subject to normal insolvency proceedings. However, as the 2008 financial crisis has shown, in particular during a period of prolonged economic instability and uncertainty, such proceedings can disrupt functions critical to the economy, jeopardising financial stability. Normal corporate insolvency procedures may not always ensure sufficient speed of intervention or adequately prioritise the continuity of the critical functions of financial institutions for the sake of preserving financial stability. In order to prevent such negative consequences of normal insolvency proceedings, it is necessary to create a special resolution framework for CCPs.

(6) The 2008 financial crisis highlighted the lack of adequate tools to preserve the critical functions provided by failing financial institutions. It further demonstrated the absence of frameworks to enable cooperation and coordination amongst authorities, in particular those located in different Member States or jurisdictions, to ensure the taking of swift and decisive action. Without such tools and in the absence of cooperation and coordination frameworks, Member States were compelled to rescue financial institutions using taxpayer money in order to stem contagion and reduce panic. While CCPs were not direct recipients of extraordinary public financial support in the 2008 financial crisis, they were protected from the effects that banks failing to perform their obligations would otherwise have had on them. A recovery and resolution framework for CCPs complements the bank resolution framework adopted under Directive 2014/59/EU of the European Parliament and of the Council (5), and is therefore necessary to prevent reliance on taxpayer money in the event of their disorderly failure. Such a framework should also address the possibility of CCPs entering into resolution for reasons other than the default of one or several of their clearing members.

(7) The objective of a credible recovery and resolution framework is to ensure, to the greatest extent possible, that CCPs set out measures to recover from financial distress, to maintain the critical functions of a CCP which is failing or likely to fail while winding up the remaining activities through normal insolvency proceedings, and to preserve financial stability and to avoid a significant adverse effect on the financial system and its ability to serve the real economy while minimising the cost to taxpayers of a CCP failure. A recovery and resolution framework further bolsters the preparedness of CCPs and authorities to mitigate financial distress and provide authorities with further insight into CCPs’ preparations for stress scenarios. It also provides authorities with powers to prepare for the potential resolution of a CCP and deal with the declining health of a CCP in a coordinated manner, thus contributing to the smooth functioning of financial markets.

(8) Currently, there are no harmonised provisions for the recovery and resolution of CCPs across the Union. Some Member States have already enacted legislative changes that require CCPs to draw up recovery plans and that introduce mechanisms to resolve failing CCPs. Furthermore, there are considerable substantive and procedural differences between Member States on the laws, regulations and administrative provisions which govern the insolvency of CCPs. The absence of common conditions, powers and processes for the recovery and resolution of CCPs is likely to constitute a barrier to the smooth functioning of the internal market and hinder cooperation between national authorities when dealing with the failure of a CCP and applying appropriate loss allocation mechanisms on its clearing members, both in the Union and globally. This is particularly true where different approaches mean that national authorities do not have the same level of control or the same ability to resolve CCPs. Those differences in recovery and resolution regimes might affect CCPs, clearing members and the clients of clearing members differently across Member States, potentially creating competitive distortions across the internal market. The absence of common rules and tools for how financial distress or failure in a CCP should be handled can affect clearing members’ and their clients’ choice to clear and CCPs’ choice of their place of establishment, thereby preventing CCPs from fully benefiting from their fundamental freedoms within the internal market. In turn, this could discourage clearing members and their clients from accessing CCPs across borders in the internal market and hinder further integration in the Union’s capital markets. Common recovery and resolution rules in all Member States are therefore necessary to ensure that CCPs are not limited in exercising their internal market freedoms by the financial capacity of Member States and their authorities to manage their failure.

(9) The review of the regulatory framework applicable to banks and to other financial institutions which has taken place in the wake of the 2008 financial crisis, and in particular the strengthening of banks’ capital and liquidity buffers, better tools for macro‐prudential policies and comprehensive rules on the recovery and resolution of banks, have reduced the likelihood of future crises and enhanced the resilience of all financial institutions and market infrastructures, including CCPs, to economic stress, whether caused by systemic disturbances or by events specific to individual institutions. Since 1 January 2015, a recovery and resolution regime for banks has applied in Member States pursuant to Directive 2014/59/EU.

(10) Building on the approach for bank recovery and resolution, competent authorities and resolution authorities should be prepared and have adequate tools at their disposal to handle situations involving CCP failures. However, due to their different functions and business models, the risks inherent in banks and CCPs are different. Specific tools and powers are therefore needed for CCP failure scenarios caused by the failure of the CCP’s clearing members or as a result of non‐default events.

(11) A regulation is the proper legal act to choose in order to complement and build on the approach established by Regulation (EU) No 648/2012, which provides for uniform prudential requirements applicable to CCPs. Setting recovery and resolution requirements in a directive could create inconsistencies by the adoption of potentially different national rules in respect of an area otherwise governed by directly applicable Union law and increasingly characterised by the cross‐border provision of CCPs’ services. Therefore uniform and directly applicable rules on recovery and resolution of CCPs should also be adopted.

(12) In order to ensure consistency with existing Union legislation in the area of financial services, as well as the greatest possible level of financial stability across the Union, the recovery and resolution regime laid down in this Regulation should apply to CCPs that are subject to the prudential requirements laid down in Regulation (EU) No 648/2012, regardless of whether they have a banking licence. While there might be differences in the risk profile associated with alternative corporate structures, CCPs are stand‐alone entities that are required to fulfil all requirements under this Regulation and under Regulation (EU) No 648/2012 independently from their parent undertaking or other group entities. The group of which a CCP forms part does not therefore need to be subject to this Regulation. The group dimension, including, inter alia, the operational, personal and financial relations of a CCP with group entities, should, however, be taken into account in the CCP’s recovery and resolution planning insofar it could affect the recovery or resolution of the CCP or insofar recovery and resolution actions could have an impact on other entities of the group.

(13) In order to ensure that resolution actions are taken efficiently and effectively, and in line with resolution objectives, Member States should appoint, as resolution authorities for the purpose of this Regulation, national central banks, competent ministries, public administrative authorities or authorities entrusted with public administrative powers to perform functions and tasks in relation to resolution, including any existing resolution authorities. Member States should also ensure that appropriate resources are allocated to those resolution authorities. In Member States where a CCP is established, adequate structural arrangements should be put in place to separate the CCP resolution functions from other functions, in particular where the authority responsible for the prudential supervision of the CCP, or prudential supervision of credit institutions or investment firms that are clearing members of the CCP, is designated as the resolution authority, to avoid any conflicts of interest and risk of regulatory forbearance. In such cases, the independence of the resolution authority’s decision‐making process should be ensured, while not preventing decision‐making from converging at the highest level.

(14) In light of the consequences that the failure of a CCP and the subsequent actions might have on the financial system and the economy of a Member State, as well as the possible ultimate need to use public funds to resolve a crisis, the Ministries of Finance or other relevant ministries in Member States should be able to decide, in line with national democratic procedures, on the use of public funds as a last resort and should consequently be closely involved, at an early stage, in the process of recovery and resolution. Therefore, with regard to the use of public funds as a last resort, this Regulation should be without prejudice to the distribution of competences between the relevant ministries or the government and the resolution authority as provided for in the legal systems of Member States.

(15) As CCPs often provide services across the Union, effective recovery and resolution requires cooperation among competent authorities and resolution authorities within supervisory and resolution colleges, notably at the preparatory stages of recovery and resolution. That includes assessing the recovery plan developed by the CCP, contributing to and reaching a joint decision on resolution plans drawn up by the resolution authority of the CCP, and addressing any impediments to resolvability of the CCP.

(16) The resolution of CCPs should strike the balance between the need, on the one hand, for procedures that take into account the urgency of the situation and allow for efficient, fair and timely solutions and, on the other, the necessity to protect financial stability in the Member States where the CCP provides services. The authorities whose areas of competence would be affected by the failure of a CCP should share their views in the resolution college to achieve those objectives. This should include in particular sharing information on the preparation of clearing members and, where relevant, clients with regard to potential default management, recovery and resolution measures and the supervisory treatment of the related exposures towards the CCP. The authorities of Member States whose financial stability could be impacted by the failure of the CCP should be able to participate in the resolution college based on their assessment of the impact that the CCP’s resolution could have on financial stability in their respective Member State. Member States should have the possibility to be represented in the resolution college by the competent authorities and resolution authorities of clearing members. Member States which are not represented by clearing members’ authorities should be able to participate by choosing between participation in the college of the competent authority of clearing members’ clients and of the resolution authority of clearing members’ clients. The authorities should provide appropriate justification for their participation, based on their analysis of the negative impact that the CCP’s resolution could have on their Member States, to the resolution authority of the CCP. Similarly, in order to ensure a regular exchange of views and coordination with relevant third‐country authorities, these should be invited to participate in resolution colleges as observers where necessary.

(17) In order to address the potential failure of a CCP in an effective and proportionate manner, authorities should take into account a number of factors when exercising their recovery and resolution powers such as the nature of the CCP’s business, ownership structure, legal and organisational structure, risk profile, size, legal status, substitutability and interconnectedness to the financial system. The authorities should also take account of whether its failure and subsequent winding up under normal insolvency proceedings would be likely to have a significant negative effect on financial markets, on other financial institutions, or on the wider economy.

(18) In order to deal in an efficient manner with failing CCPs, competent authorities should have the power to impose preparatory measures on CCPs. A minimum standard should be established as regards the contents and information to be included in recovery plans to ensure that all CCPs in the Union have sufficiently detailed recovery plans should they face financial distress. Such recovery plan should contemplate an appropriate range of scenarios, envisaging both systemic and specific stresses to the CCP, that would endanger its viability, also taking into account the potential impact of contagion in a crisis, both domestic and cross‐border. The scenarios should be more severe than those used for the purposes of regular stress testing pursuant to Article 49 of Regulation (EU) No 648/2012, while remaining plausible. The recovery plan should cover a broad range of scenarios including scenarios resulting from default events, non‐default events and a combination of both; and should include comprehensive arrangements for the re‐establishment of a matched book, for the full allocation of losses arising from clearing member default, and adequate absorbency for all other types of losses. Recovery plans should distinguish between different types of non‐default events. The recovery plan should form part of the operating rules of the CCP agreed contractually with clearing members. Those operating rules should further contain provisions to ensure the enforceability of recovery measures outlined in the recovery plan in all scenarios. Recovery plans should not assume access to extraordinary public financial support or expose taxpayers to the risk of loss.

(19) CCPs should be required to draw up and regularly review and update their recovery plans. The recovery phase in that context should start when there is a significant deterioration in the CCP’s financial situation or risk of breach of its capital and prudential requirements under Regulation (EU) No 648/2012 that could lead to the infringement of its authorisation requirements that would justify the withdrawal of its authorisation pursuant to Regulation (EU) No 648/2012. This should be indicated with reference to a framework of qualitative or quantitative indicators included in the recovery plan.

(20) In order to create sound incentives ex ante and to ensure a fair allocation of losses, recovery plans should ensure that the application of recovery tools appropriately balances the allocation of losses between CCPs, clearing members and, where applicable, their clients. As a general principle, losses in recovery should be distributed between CCPs, clearing members, and, where applicable, their clients as a function of their responsibility for the risk transferred to the CCP and their ability to control and manage such risks. Recovery plans should ensure that the CCP’s capital is exposed to losses caused by both default and non‐default events, before losses are allocated to clearing members. As an incentive for proper risk management and to further reduce the risks of losses for the taxpayer, the CCP should use a portion of its pre‐funded dedicated own resources as referred to in Article 43 of Regulation (EU) No 648/2012, which can include any capital it holds in addition to its minimum capital requirements, to comply with the notification threshold referred to in the delegated act adopted on the basis of Article 16(3) of Regulation (EU) No 648/2012, as a recovery measure before resorting to other recovery measures requiring financial contributions from clearing members. That additional amount of pre‐funded dedicated own resources, which is distinct from the pre‐funded own resources referred to in Article 45(4) of Regulation (EU) No 648/2012, should not be lower than 10 % nor higher than 25 % of the risk-based capital requirements calculated in accordance with Article 16(2) of Regulation (EU) No 648/2012 irrespective of whether those requirements are lower or higher than the initial capital referred to in Article 16(1) of that Regulation.

(21) The CCP should submit its recovery plan to the competent authority which should without undue delay transmit the plan to the supervisory college, established under Regulation (EU) No 648/2012, for a complete assessment, to be carried out by joint decision of the college. The assessment should include whether the plan is comprehensive and whether it could feasibly restore the viability of the CCP, in a timely manner, including in periods of severe financial distress.

(22) Recovery plans should comprehensively set out the actions that the CCP would take to address any unmatched outstanding obligations, uncovered loss, liquidity shortfall, or capital inadequacy, as well as the actions to replenish any depleted pre‐funded financial resources and liquidity arrangements in order to restore the CCP’s viability and its continuing ability to meet its requirements for authorisation. Neither the power of the resolution authority to apply a resolution cash call nor the requirement to have a minimum contractual commitment for the recovery cash call should affect the right of the CCP to introduce recovery cash calls in its rules above the minimum obligatory contractual commitment specified in this Regulation or the risk management of the CCP.

(23) Recovery plans should also consider cyber‐attacks which could lead to a significant deterioration of the financial situation of the CCP or to a risk of breaching prudential requirements under Regulation (EU) No 648/2012.

(24) CCPs should ensure that their recovery plan is non‐discriminatory and balanced in terms of its impact and the incentives it creates. The effects of the recovery measures on clearing members and, where the relevant information is available, their clients and on the financial system of the Union or of one or more of its Member States more broadly should be proportionate. In particular, in accordance with Regulation (EU) No 648/2012 CCPs have to ensure that their clearing members have limited exposures toward the CCP. CCPs should ensure that all relevant stakeholders are involved in the drawing‐up of the recovery plan through their involvement in the CCP’s risk committee, as the case might be, and by being appropriately consulted. Since opinions can be expected to differ among stakeholders, CCPs should establish clear processes to manage the diversity of stakeholders’ views as well as any conflict of interest between those stakeholders and the CCP.

(25) In view of the global nature of the markets served by CCPs, the CCP’s operating rules should include contractual provisions to ensure its ability to apply the recovery options, where necessary, to contracts or assets governed by the law of a third country or to entities based in third countries.

(26) Where a CCP does not present an adequate recovery plan, competent authorities should be able to require the CCP to take the measures necessary to redress the material deficiencies of the plan in order to strengthen the business of the CCP and ensure that the CCP could allocate losses, restore its capital and, where relevant, re‐match its book in the event of failure. That power should allow competent authorities to take preventive action to the extent that it is necessary to address any deficiencies and, therefore, to meet the objectives of financial stability.

(27) In the exceptional cases of variation margin gains haircutting following a non‐default event and if recovery is successful, the competent authority should be able to require the CCP to recompense its clearing members proportionately to their loss in excess of their contractual commitments, through cash payments or, where appropriate, to require the CCP to issue instruments recognising a claim on the future profits of the CCP.

(28) Resolution planning is an essential component of effective resolution. The plans should be drawn up by the resolution authority of the CCP and jointly agreed in the resolution college. The plans should cover a broad range of scenarios, distinguishing scenarios resulting from default events, non‐default events and a combination of both, as well as different types of non‐default events. Authorities should have all the information necessary to identify and ensure the continuity of critical functions. The content of a resolution plan should, however, be appropriate to the activities of the CCP and the types of products it clears and it should be based, inter alia, on the information provided by it. In order to facilitate the enforcement of resolution cash calls and of the reduction of the amount of any gains payable to a non‐defaulting clearing member of a CCP under resolution, a reference to the power of the resolution authority to require such resolution cash calls and such reduction should be included in the operating rules of the CCP. Where needed, the operating rules of the CCP that are agreed contractually with clearing members should contain provisions to ensure the enforceability of other resolution measures by resolution authorities.

(29) Resolution authorities, on the basis of the assessment of resolvability, should have the power to require changes to the legal or operational structure and organisation of CCPs directly or indirectly through the competent authority, to take measures which are necessary and proportionate to reduce or remove material impediments to the application of resolution tools and ensure their resolvability. Taking into account the diverse structure of the groups that CCPs belong to, the differences in structures compared to banking groups, and the different regulatory frameworks that apply to individual entities within such groups, the resolution authority of the CCP, in consultation with the competent authority of the CCP, should be able to assess whether enforcing changes to the legal or operational structures of the CCP, or any group entity directly or indirectly under its control, involves changes in the structures of the group that the CCP belongs to that could lead to issues of legal challenge or issues of enforceability, depending on the specific legal circumstances that apply. The resolution authority, when assessing how to remove such impediments to resolution, should be able to suggest a different set of resolvability measures than requiring changes to the legal or operational structures of the group, if the use of such alternative measures would remove the impediments to resolvability in an equivalent way.

(30) As regards resolution plans and resolvability assessments day‐to‐day supervisory considerations are outweighed by the need to expedite and ensure swift restructuring actions in order to secure a CCP’s critical functions and safeguard financial stability. In the event of disagreement between the different members of the resolution college on decisions to be taken with regard to the CCP’s resolution plan, the assessment of the CCP’s resolvability and the decision to remove any impediments thereto, the European Supervisory Authority (European Securities and Markets Authority) (ESMA) should play a mediation role in accordance with Article 19 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council (6). Such binding mediation by ESMA should nonetheless be prepared for its consideration by an ESMA internal committee, in view of the competences of ESMA members to ensure financial stability and to oversee clearing members in several Member States. Certain competent authorities under the Regulation (EU) No 1093/2010 of the European Parliament and of the Council (7) should be invited to participate as observers to that ESMA internal committee in view of the fact that such authorities carry out similar tasks under Directive 2014/59/EU. Such binding mediation should not prevent non‐binding mediation in accordance with Article 31 of Regulation (EU) No 1095/2010 in other cases. In accordance with Article 38 of Regulation (EU) No 1095/2010, such binding mediation may not impinge on the fiscal responsibilities of Member States.

(31) It could be necessary for the recovery plan of the CCP to set out the conditions under which the provision of possible contractually binding financial support agreements, guarantees or other forms of operational support from a parent undertaking or another group entity to a CCP within the same group would be triggered. Transparency regarding such arrangements would mitigate risks to the liquidity and solvency of the group entity providing support to a CCP facing financial distress. Therefore, any change to such arrangements affecting the quality and nature of such group support should be considered a material change for the purpose of reviewing the recovery plan.

(32) Given the sensitivity of the information contained in the recovery and resolution plans, those plans should be subject to appropriate confidentiality provisions.

(33) Competent authorities should transmit the recovery plans and any changes thereto to the relevant resolution authorities, and the latter should transmit the resolution plans and any changes thereto to competent authorities, thus permanently keeping every relevant authority fully informed.

(34) In order to preserve financial stability, it is necessary that competent authorities are able to remedy the deterioration of a CCP’s financial and economic situation before that CCP reaches a point at which authorities have no other alternative but to resolve it or to direct the CCP to change its recovery measures where they could be detrimental for overall financial stability. Competent authorities should therefore be granted early intervention powers to avoid or minimise adverse effects on financial stability or on the interests of clients that could result from the CCP’s implementation of certain measures. Early intervention powers should be conferred on competent authorities in addition to their powers provided for in the national law of Member States or under Regulation (EU) No 648/2012 for circumstances other than those considered to be early intervention. Early intervention powers should include the power to restrict or prohibit any remuneration of equity and instruments treated as equity, including dividend payments and buybacks by the CCP, to the fullest extent possible without triggering an event of default, and also the power to restrict, prohibit or freeze any payments of variable remuneration as defined by the CCP’s remuneration policy pursuant to Article 26(5) of Regulation (EU) No 648/2012, discretionary pension benefits or severance packages to senior management.

(35) In the framework of early intervention powers, and in accordance with the relevant provisions under national law, the competent authority should be able to appoint a temporary administrator, either to replace or to temporarily work with the board and senior management of the CCP. The task of the temporary administrator should be to exercise any powers conferred on it, subject to any condition imposed on it upon its appointment, with a view to promoting solutions to redress the financial situation of the CCP. The appointment of the temporary administrator should not unduly interfere with the rights of the shareholders or owners or with procedural obligations established under Union or national company law and should respect international obligations of the Union and Member States, relating to investment protection.

(36) During the recovery and early intervention phases, shareholders should retain their rights in full. They should lose such rights once the CCP has been put under resolution. Any remuneration of equity and instruments treated as equity, including dividend payments and buybacks by the CCP, should be restricted or prohibited in recovery, to the fullest extent possible without triggering an event of default. Equity holders of a CCP should absorb losses first in resolution in a way that minimises the risk of legal challenge by them where such losses are greater than the losses that they would have incurred under normal insolvency proceedings also known as the ‘no creditor worse off’ principle. A resolution authority should be able to deviate from the ‘no creditor worse off’ principle. However, a shareholder or a creditor incurring greater loss than it would have incurred under normal insolvency proceedings would be entitled to the payment of the difference.

(37) The resolution framework should provide for timely entry into resolution before a CCP is insolvent. A CCP should be considered to be failing or likely to fail when it infringes or is likely in the near future to infringe the requirements for continuing authorisation, when its recovery has failed or is likely to fail to restore its viability, when the CCP is unable or is likely to be unable to provide a critical function, when the assets of the CCP are or are likely in the near future to be less than its liabilities, when the CCP is or is likely in the near future to be unable to pay its debts or other liabilities as they fall due, or when the CCP requires extraordinary public financial support. However, the fact that a CCP does not comply with all the requirements for authorisation should not justify by itself the entry into resolution.

(38) The provision of emergency liquidity assistance from a central bank, where such a facility is available, should not be a condition that demonstrates that a CCP is or will be, in the near future, unable to pay its liabilities as they fall due. In order to preserve financial stability, in particular in the case of a systemic liquidity shortage, State guarantees on liquidity facilities provided by central banks or State guarantees of newly issued liabilities to remedy a serious disturbance in the economy of a Member State should not trigger entry into resolution, provided that a number of conditions are met.

(39) Members of the European System of Central Banks (ESCB), other Member States’ bodies performing similar functions, other Union public bodies charged with or intervening in the management of the public debt, and the Bank for International Settlements as well as other entities listed in Article 1(4) and (5) of Regulation (EU) No 648/2012 can act in the capacity of a clearing member in connection with their operations. Loss allocation tools envisaged in the recovery plan of CCPs should not apply to those entities. Similarly, resolution authorities should not apply loss allocation tools with regard to those entities, in order to avoid the exposure of public money.

(40) Where a CCP meets the conditions for resolution, the resolution authority of the CCP should have at its disposal a harmonised set of resolution tools and powers. They should enable the resolution authority to address scenarios caused both by default and non‐default events, or a combination of both. Their exercise should be subject to common conditions, objectives, and general principles. In particular, the application of such tools or powers should not impinge on the effective resolution of cross‐border groups.

(41) The prime objectives of resolution should be to ensure the continuity of critical functions, to avoid adverse effects on financial stability, and to protect public funds.

(42) The critical functions of a failing CCP should be maintained, although re‐structured with changes to the management where appropriate, through the application of resolution tools and, to the largest extent possible, with the use of private funds and without reliance on extraordinary public financial support. This objective could be achieved by allocating outstanding losses and restoring the CCP to a matched book through application of the position and loss allocation tools in the case of default losses, or, in the case of non‐default losses, through the write‐down of equity instruments and the write‐down and conversion to equity of unsecured liabilities to absorb losses and recapitalise the CCP. To prevent the need for the application of government stabilisation tools, the resolution authority should also be able to use the resolution cash call following a non‐default event. A CCP or specific clearing service should also be able to be sold to or merged with a solvent third‐party CCP that is able to conduct and manage the transferred clearing activities. In line with the objective of maintaining the critical functions of the CCP and prior to taking the actions described above, the resolution authority should generally enforce any existing and outstanding contractual obligations towards the CCP in line with how they would be called in its operating rules, including in particular any contractual obligations by clearing members to meet recovery cash calls or to take on positions of defaulting clearing members, whether through an auction or other agreed means in the CCP’s operating rules, as well as any existing and outstanding contractual obligations committing parties other than clearing members to any forms of financial support.

(43) Rapid and decisive action is necessary to sustain market confidence and minimise contagion. Once the conditions for resolution have been met, the resolution authority of the CCP should not delay in taking appropriate and coordinated resolution action in the public interest. The failure of a CCP can occur in circumstances that require an immediate reaction by the relevant resolution authority. That authority should therefore be allowed to take resolution actions notwithstanding the exercise of recovery measures by the CCP or without imposing an obligation to first use the early intervention powers.

(44) When taking resolution actions, the resolution authority of the CCP should take into account and follow the measures provided for in the resolution plans drawn up within the resolution college, unless the resolution authority considers, taking into account the circumstances of the case, that the resolution objectives will be achieved more effectively by taking actions which are not provided for in the resolution plans. The resolution authority should take into account the general principles of decision‐making, including the need to balance the interests of different stakeholders of the CCP and to ensure transparency towards and involvement of the relevant authorities of Member States where the proposed decision or action could have implications on the financial stability or fiscal resources. In particular, the resolution authority should inform the resolution college of the planned resolution actions, including where such actions deviate from the resolution plan.

(45) Interference with property rights should be proportionate to the financial stability risk. Resolution tools should therefore be applied only with respect to those CCPs that meet the conditions for resolution, specifically where it is necessary to pursue the objective of financial stability in the public interest. Resolution tools and powers could disrupt the rights of shareholders, creditors, clearing members and, where applicable, clients of clearing members. Resolution action should therefore be taken only where necessary in the public interest and any interference with those rights should be compatible with the Charter of Fundamental Rights of the European Union (‘the Charter’).

(46) Affected shareholders, clearing members and other creditors of the CCP should not incur losses greater than those which they would have incurred if the resolution authority had not taken resolution action in relation to the CCP and they had instead been subject to all applicable outstanding obligations pursuant to the CCP’s default rules or other contractual arrangements in its operating rules, and the CCP had been wound up in normal insolvency proceedings (‘no creditor worse off’ principle). In the event of a partial transfer of assets of a CCP under resolution to a private purchaser or to a bridge CCP, the residual part of the CCP under resolution should be wound up under normal insolvency proceedings.

(47) For the purpose of protecting the rights of shareholders, of clearing members and of other creditors, clear rules should be laid down concerning the valuation of the assets and liabilities of the CCP and the valuation of the treatment that shareholders, clearing members and other creditors would have received if the resolution authority had not taken resolution action. This should compare the treatment that shareholders, clearing members and other creditors have actually been afforded in resolution and the treatment they would have received if the resolution authority had not taken resolution action in relation to the CCP and if they had instead been subject to possible outstanding obligations pursuant to the CCP’s recovery plan or other arrangements in its operating rules and the CCP had been wound up in normal insolvency proceedings. The use of the resolution cash call, which should be included in the CCP’s operating rules, is reserved for the resolution authority. It cannot be used by the CCP, or an administrator or liquidator in insolvency and it should therefore not be part of the treatment that shareholders, clearing members and other creditors would have received if the resolution authority had not taken resolution action. Any use of the power to reduce the amount of any gains payable to a non‐defaulting clearing member by the resolution authority that exceeds contractually agreed limits for such a reduction should also not be part of the treatment that shareholders, clearing members and other creditors would have received if the resolution authority had not taken resolution action. Where shareholders, clearing members and other creditors have received, in payment of, or compensation for, their claims, less than the amount that they would have received if the resolution authority had not taken resolution action in relation to the CCP and they had instead been subject to possible outstanding obligations pursuant to the CCP’s default rules or other contractual arrangements in its operating rules and the CCP had been wound up in normal insolvency proceedings, they should be entitled to the payment of the difference. Clients should only be included in that comparison and should only be entitled to the payment of any difference in treatment when there is a contractual basis for a direct claim from clients against the CCP, making them creditors of the CCP. Only in such cases can the resolution authority control the direct impact of its actions. It should be possible to challenge that comparison separately from the resolution decision. Member States should be free to decide on the procedure as to how to pay any difference of treatment that has been determined to shareholders, clearing members and other creditors.

(48) Recovery and resolution actions can indirectly affect clients and indirect clients that are not creditors of the CCP, to the extent that costs of recovery and resolution have been passed to those clients and indirect clients under the applicable contractual arrangements. Therefore, the impact of a CCP recovery and resolution scenario on clients and indirect clients should also be addressed through the same contractual arrangements with the clearing members and clients that provide them with clearing services. This can be achieved by ensuring that, if contractual arrangements allow clearing members to pass on to their clients the negative consequences of the resolution tools, those contractual arrangements also include, on an equivalent and proportionate basis, the right of clients to any compensation clearing members receive from the CCP or any cash equivalent of such compensation or any proceeds they receive following a ‘no creditor worse off’ claim, to the extent that these relate to client positions. Such provisions should also apply to the contractual arrangements by clients and indirect clients offering indirect clearing services to their clients.

(49) To ensure the effective resolution of a CCP, the valuation process should determine as accurately as possible any losses that need to be allocated for the CCP to re‐establish a matched book of outstanding positions and to meet ongoing payment obligations. The valuation of assets and liabilities of a failing CCP should be based on fair, prudent and realistic assumptions at the moment when the resolution tools are applied. The value of liabilities should not, however, be affected in the valuation by the financial state of the CCP. It should be possible, for reasons of urgency, for resolution authorities to make a rapid valuation of the assets or the liabilities of a failing CCP. That valuation should be provisional and should apply until an independent valuation is carried out.

(50) Upon entry into resolution of the CCP, the resolution authority should enforce any outstanding contractual obligations set out in the operating rules of the CCP, including outstanding recovery measures, except where the exercise of another resolution power or tool is more appropriate to mitigate adverse effects for financial stability or to secure the critical functions of the CCP in a timely manner. The resolution authority should have the right, but not the obligation, to enforce those contractual obligations still after resolution if the reasons for refraining from their enforcement no longer exist. In order to allow for the clearing members and other relevant parties to prepare for the enforcement of the remaining obligations, the resolution authority should notify the relevant clearing members and other parties in advance. This pre‐notification period should be from three to six months. The resolution authority should determine, in consultation with the competent authorities and resolution authorities of the affected clearing members and any other parties committed by existing and outstanding obligations, whether the reasons for refraining from enforcing the contractual obligations have ceased to exist and whether to enforce the remaining obligations. If the reasons continue to exist, the resolution authority should refrain from enforcing those obligations. The proceeds from the delayed enforcement of the outstanding contractual obligations should be used to recover any public funds used for the payment of ‘no creditor worse off’ claims resulting from the resolutions authority’s decision to refrain from enforcing those obligations or the application of any government stabilisation tool. The resolution authority should use this power of delayed enforcement only to the extent that the ‘no creditor worse off’ safeguard is not breached with respect to the stakeholder that will be subject to the delayed enforcement. In the case of default losses, the resolution authority should restore the CCP to a matched book and allocate outstanding losses through application of position and loss allocation tools. In the case of non‐default losses, losses should be absorbed by regulatory capital instruments and should be allocated to shareholders up to their capacity either through the cancellation or transfer of instruments of ownership or through severe dilution. Where those instruments are not sufficient, resolution authorities should have the power to write‐down unsecured debt and liabilities, in accordance with their ranking under applicable national insolvency law, and apply loss allocation tools, to the extent necessary without jeopardising broader financial stability.

(51) If, after losses have been absorbed and, where applicable, the CCP has been restored to a matched book and the pre‐funded resources of the CCP remain depleted, the resolution authority should ensure that those resources are restored to the levels necessary to meet regulatory requirements, either through the continued exercise of the tools in the CCP’s operating rules or through other actions. In particular, resolution authorities should have the possibility to compensate non‐defaulting clearing members that would have been entitled to a ‘no creditor worse off’ compensation payment for the application of loss allocation tools that would result in losses in excess of those that the clearing members would have borne under their obligations under the CCP’s operating rules with instruments of ownership, debt instruments or instruments recognising a claim on the CCP’s future profits. When assessing the amount and the form of compensation, the resolution authority can consider, for example, the financial soundness of the CCP, and the quality of instruments available for compensation and for meeting the ‘no creditor worse off’ safeguard. To maintain an adequate incentive structure, such compensation should reflect the extent to which a clearing member has supported the recovery of the CCP and therefore also take into account the remaining outstanding contractual obligations of the clearing members towards that CCP. Such compensation should be deducted from any entitlement to a ‘no creditor worse off’ payment.

(52) Resolution authorities should also ensure that the costs of the resolution of the CCP are minimised and that creditors of the same class are treated in an equitable manner. The resolution authority should be able to take a resolution action which deviates from the principle of equal treatment of creditors if it is justified in the public interest to achieve the resolution objectives and is proportionate to the risk addressed. If the resolution authority uses such measure it should not discriminate anybody on the basis of nationality.

(53) The resolution of a CCP should not entail calling on extraordinary public financial support. The outstanding recovery tools and resolution tools, in particular the write‐down tool, should be applied to the fullest extent possible before or together with any public sector injection of capital or equivalent extraordinary public financial support is given to a CCP. The use of extraordinary public financial support to assist in the resolution of failing institutions is to be a last resort, be limited in time and comply with the relevant State aid provisions.

(54) An effective resolution regime should minimise the costs of the resolution of a failing CCP borne by the taxpayers. It should ensure that CCPs can be resolved without jeopardising financial stability. The write‐down tool and the loss and position allocation tools should achieve that objective by ensuring that shareholders and counterparties who are among the creditors of the failing CCP suffer appropriate losses and bear an appropriate part of the costs arising from the failure of the CCP. The write‐down and the loss and position allocation tools therefore give shareholders and counterparties of CCPs a stronger incentive to monitor the health of a CCP during normal circumstances in accordance with the recommendations of the Financial Stability Board (FSB) provided for in its document ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’.

(55) In order to ensure that resolution authorities have the necessary flexibility to allocate losses and positions to counterparties in a range of circumstances, it is appropriate that those authorities should be able to apply the position and loss allocation tools both where the objective is to maintain critical clearing services within the CCP under resolution and in conjunction with the transfer of critical services to a bridge CCP or a third party after which the residual part of the CCP ceases to operate and is wound up.

(56) Where the position and loss allocation tools are applied with the objective of restoring the viability of the failing CCP to enable it to continue to operate as a going concern, the resolution should be accompanied by replacement of management, except where retention of management is appropriate and necessary for the achievement of the resolution objectives, and a subsequent restructuring of the CCP and its activities in a way that addresses the reasons for its failure. That restructuring should be achieved through the implementation of a business reorganisation plan, which should be compatible with the restructuring plan that the CCP might be required to submit pursuant to the State aid framework.

(57) The position and loss allocation tools should be exercised with a view to re‐matching the CCP’s book, stemming any further losses and obtaining additional resources to help recapitalise the CCP and replenish its pre‐funded resources. In order to ensure that they are effective and achieve their objective, they should be able to apply to as wide a range of contracts giving rise to unsecured liabilities or creating an unmatched book for the failing CCP as possible. They should provide for the possibility to auction defaulters’ positions among remaining clearing members or to forcibly allocate them to the extent that voluntary arrangements established as part of recovery plan are not exhausted upon entry into resolution, to partially or fully terminate the contracts of defaulted clearing members, of an affected clearing service or asset class and other contracts of the CCP, to further haircut outgoing variation margin payments to such members and, where applicable, their clients, to exercise any outstanding recovery cash calls set out in recovery plans, and to exercise additional resolution cash calls and write‐down of capital and debt instruments issued by the CCP or other unsecured liabilities and a conversion of any debt instruments into shares. This includes the possibility to apply the loss allocation tools to contribute to the restoration of a matched book by providing the CCP with funds to accept an auction bid, enabling the CCP to allocate the defaulter’s positions or to make payments on the terminated contracts.

(58) When applying the loss allocation tool that allows the reduction of the value of any gains payable by the CCP to non‐defaulting clearing members, the resolution authority should rely on processing of variation margin in accordance with the CCP’s account structure, the operation of the reduction of the value of any gains payable by the CCP to non‐defaulting clearing members in recovery, if applicable, and the ‘no creditor worse off’ principle.

(59) With due respect for the impact on financial stability and as a last resort, resolution authorities should be able to exclude or partially exclude some contracts from position and loss allocation in a number of circumstances. Where such exclusions are applied, it should be possible to increase the level of exposure or loss applied to other contracts to take account of such exclusions subject to the ‘no creditor worse off’ principle being respected.

(60) Where the resolution tools have been applied to transfer the critical functions or viable business of a CCP to a sound entity such as a private sector purchaser or bridge CCP, the residual part of the CCP should be liquidated within an appropriate time frame having regard to any need for the failing CCP to provide services or support to enable the purchaser or bridge CCP to carry out the activities or provide the services acquired by virtue of that transfer.

(61) The sale of business tool should enable authorities to sell the CCP or parts of its business to one or more purchasers without the consent of shareholders. When applying the sale of business tool, authorities should make arrangements for the marketing of that CCP or part of its business in an open, transparent and non‐discriminatory process, while aiming to maximise, as far as possible, the sale price.

(62) Any net proceeds from the transfer of assets or liabilities of the CCP under resolution when applying the sale of business tool should benefit the entity left in the winding up proceedings. Any net proceeds from the transfer of instruments of ownership issued by the CCP under resolution when applying the sale of business tool should benefit the shareholders. Any consideration paid by the purchaser should also benefit any non‐defaulting clearing members that have suffered losses. Any such net proceeds or benefit should be subject to the full recoupment of any public fund provided in resolution. Proceeds should be calculated net of the costs that have arisen from the failure of the CCP and from the resolution process.

(63) In order to perform the sale of business in a timely manner and protect financial stability, the assessment of the buyer of a qualifying holding should be carried out in a timely manner that does not delay the application of the sale of business tool. The CCP, the purchaser or both, depending on the effects of the sale of business tool and the form of acquisition, should be able to exercise or maintain existing rights of membership and accessing payment and settlement systems and other linked financial market infrastructures and trading venues. Such rights should not be denied on the basis either of non‐compliance with the relevant criteria for membership or participation, or of insufficient credit rating. A purchaser who does not meet those criteria can only exercise such rights for a period to be specified by the resolution authority.

(64) Information concerning the marketing of a failing CCP and the negotiations with potential acquirers prior to the application of the sale‐of‐business tool is likely to be of systemic importance. In order to ensure financial stability, it is important that it is possible for the disclosure to the public of such information required under Regulation (EU) No 596/2014 of the European Parliament and of the Council (8) to be delayed for the time necessary to plan and structure the resolution of the CCP in accordance with delays permitted under the market abuse regime.

(65) As a CCP which is wholly or partially owned by one or more public authorities or controlled by the resolution authority, a bridge CCP should have as its main purpose ensuring that essential financial services continue to be provided to the clearing members and clients of the CCP that had been placed under resolution and that essential financial activities continue to be performed. The bridge CCP should be operated as a viable going concern entity and be put back on the market when conditions are appropriate or wound up if it is no longer viable.

(66) Where all other options are unavailable or demonstrably insufficient to safeguard financial stability, government participation in the shape of equity support or temporary public ownership should be possible, in accordance with applicable rules on State aid, including a restructuring of the operations of the CCP. In order to avoid moral hazard, such extraordinary public financial support should be provided only as a last resort, be temporary in nature and always be recovered over an appropriate period. Therefore, while not constituting an obstacle to applying government stabilisation tools, comprehensive and credible arrangements for the recoupment of funds should be established by Member States. The application of government stabilisation tools is without prejudice to the role of any central bank in potentially providing liquidity to the financial system, at the central bank’s exclusive discretion, even in times of stress.

(67) To ensure the ability of a resolution authority to apply the loss and position allocation tools to contracts with entities based in third countries, recognition of that possibility should be included in the operating rules of the CCP.

(68) Resolution authorities should have all the necessary legal powers that, in different combinations, could be exercised when applying the resolution tools. They should include the power to transfer instruments of ownership, assets, rights, obligations or liabilities of a failing CCP to another entity such as another CCP or a bridge CCP, the power to write down or cancel instruments of ownership, or write down or convert liabilities of a failing CCP, the power to write down variation margin, the power to enforce any outstanding obligations of third parties in relation to the CCP, including recovery cash calls, as set out in the CCP’s operating rules, and position allocations, the power to exercise resolution cash calls, the power to terminate contracts of the CCP partially and fully, the power to replace the management and the power to impose a temporary moratorium on the payment of claims. The CCP and the members of its board and senior management should remain liable, subject to national civil or criminal law, for the failure of the CCP.

(69) The resolution framework should include procedural requirements to ensure that resolution actions are properly notified and made public. However, as information obtained by resolution authorities and their professional advisers during the resolution process is likely to be sensitive, before the resolution decision is made public, it should be subject to an effective confidentiality regime. The fact that information on the contents anddetails of recovery and resolution plans and the result of any assessment of those plans could have far‐reaching effects, in particular on the undertakings concerned, must be taken into account. Any information provided in respect of a decision before it is taken, be it on whether the conditions for resolution are satisfied, on the application of a specific tool or of any action during the proceedings, must be presumed to have effects on the public and private interests concerned by the action. Information that the resolution authority is examining a specific CCP could be enough for there to be negative effects on that CCP. It is therefore necessary to ensure that there are appropriate mechanisms for maintaining the confidentiality of such information, such as the content and details of recovery and resolution plans and the result of any assessment carried out in that context.

(70) Resolution authorities should have ancillary powers to ensure the effectiveness of the transfer of instruments of ownership or debt instruments and assets, liabilities, rights and obligations, including positions and related margins. Subject to the safeguards specified in this Regulation, those powers should include the power to remove the rights of third parties from the transferred instruments or assets and the power to enforce contracts and to provide for the continuity of arrangements vis‐à‐vis the recipient of the transferred assets and instruments of ownership. However, the rights of employees to terminate a contract of employment should not be affected. The right of a party to terminate a contract with a CCP under resolution, or a group entity thereof, for reasons other than the resolution of the failing CCP should not be affected either. Resolution authorities should have the ancillary power to require the residual CCP that is being wound up under normal insolvency proceedings to provide services that are necessary to enable the CCP to which assets, contracts or instruments of ownership have been transferred by virtue of the application of the sale of business tool or the bridge CCP tool to operate its business.

(71) Given that crisis management measures could be required to be taken urgently due to serious financial stability risks in the Member State and the Union, any procedure under national law relating to the application for ex‐ante judicial approval of a crisis management measure and the court’s consideration of such an application should be expeditious. Given the requirement for a crisis management measure to be taken urgently, the court should give its decision within 24 hours and Member States should ensure that the relevant authority can take its decision immediately after the court’s decision. This should be without prejudice to the right of interested parties to request the court to set aside the decision for a limited period after the resolution authority has taken the crisis management measure.

(72) In accordance with Article 47 of the Charter, the parties concerned have the right to due process and to an effective remedy against the measures affecting them. The decisions taken by the resolution authorities should therefore be subject to the right of appeal.

(73) Resolution action taken by national resolution authorities might require economic assessments and a large margin of discretion. The national resolution authorities are specifically equipped with the expertise needed for making those assessments and for determining the appropriate use of the margin of discretion. Therefore, it is important to ensure that the economic assessments made by national resolution authorities in that context are used as a basis by national courts when reviewing the crisis management measures concerned. However, the complex nature of those assessments should not prevent national courts from examining whether the evidence relied on by the resolution authority is factually accurate, reliable and consistent, whether that evidence contains all relevant information which should be taken into account in order to assess a complex situation and whether it is capable of substantiating the conclusions drawn therefrom.

(74) In order to cover situations of extreme urgency and since the suspension of any decision of the resolution authorities might impede the continuity of critical functions, it is necessary to provide that the lodging of any appeal should not result in automatic suspension of the effects of the challenged decision and that the decision of the resolution authority should be immediately enforceable.

(75) In addition, where necessary in order to protect third parties who have acquired assets, contracts, rights and liabilities of the CCP under resolution in good faith by virtue of the exercise of the resolution powers by the resolution authorities and to ensure the stability of the financial markets, a right of appeal should not affect any subsequent administrative act or transaction concluded on the basis of an annulled decision. In such cases, remedies for a wrongful decision should therefore be limited to the award of compensation for the damages suffered by the affected persons.

(76) In the interest of efficient resolution, and in order to avoid conflicts of jurisdiction, no normal insolvency proceedings for the failing CCP should be opened or continued whilst the resolution authority is exercising its resolution powers or applying the resolution tools, except at the initiative or with the consent of the resolution authority. It is useful and necessary to suspend, for a limited period, certain contractual obligations so that the resolution authority has time to put into practice the resolution tools. However, this should not apply to obligations of a failing CCP towards systems designated under Directive 98/26/EC of the European Parliament and of the Council (9), including other CCPs and central banks. Directive 98/26/EC reduces the risk associated with participation in payment and securities settlement systems, in particular by reducing disruption in the event of the insolvency of a participant in such a system. In order to ensure that those protections apply appropriately in crisis situations, whilst maintaining appropriate certainty for operators of payment and securities settlement systems and other market participants, a crisis prevention measure or a resolution action should not be deemed to be insolvency proceedings within the meaning of Directive 98/26/EC, provided that the substantive obligations under the contract continue to be performed. However, the operation of a system designated under or the right to collateral security guaranteed by, Directive 98/26/EC should not be undermined.

(77) In order to ensure that resolution authorities, when transferring assets and liabilities to a private sector purchaser or bridge CCP, have an adequate period to identify contracts that need to be transferred, it might be appropriate to impose proportionate restrictions on the rights of counterparties to close out, accelerate or otherwise terminate financial contracts before the transfer is made. Such a restriction would be necessary to allow authorities to obtain a true picture of the balance sheet of the failing CCP, without the changes in value and scope that extensive exercise of termination rights would entail. In order to interfere with the contractual rights of counterparties to the minimum extent necessary, the restriction on termination rights should be limited to the shortest period possible and apply only in relation to the crisis prevention measure or resolution action, including the occurrence of any event directly linked to the application of such a measure, and the rights to terminate arising from any other default, including failure to pay or deliver margins, should remain.

(78) In order to preserve legitimate capital market arrangements in the event of a transfer of some, but not all, of the assets, contracts, rights and liabilities of a failing CCP, it is appropriate to include safeguards to prevent, as appropriate, the splitting of linked liabilities, rights and contracts. Such a restriction on selected practices in relation to linked contracts and related collateral should extend to contracts with the same counterparty covered by security arrangements, title transfer financial collateral arrangements, set‐off arrangements, close out netting arrangements, and structured finance arrangements. Where the safeguard applies, resolution authorities should seek to transfer all linked contracts within a protected arrangement, or leave them all with the residual failing CCP. Those safeguards should ensure that the regulatory capital treatment of exposures covered by a netting arrangement for the purposes of Directive 2013/36/EU of the European Parliament and of the Council (10) is affected to a minimum degree.

(79) Union CCPs provide services to clearing members and their clients located in third countries and third‐country CCPs provide services to clearing members and their clients located in the Union. Effective resolution of internationally active CCPs requires cooperation between Member States and third‐country authorities. For that purpose ESMA should provide guidance on the relevant content of cooperation arrangements to be concluded with authorities of third countries. Those cooperation arrangements should ensure effective planning, decision‐making and coordination in respect of internationally active CCPs. National resolution authorities should recognise and enforce third‐country resolution proceedings in certain circumstances. Cooperation should also take place with regard to subsidiaries of Union or third‐country CCPs and their clearing members and their clients.

(80) In order to ensure the consistent application of administrative penalties across Member States for breaches of this Regulation, this Regulation should provide for a list of key administrative penalties and other administrative measures that need to be available to the resolution authorities and the competent authorities, for the power to impose those administrative penalties and other administrative measures on all persons, whether legal or natural, responsible for an infringement, and for a list of key criteria when determining the level and type of those administrative penalties and other administrative measures and for levels of administrative pecuniary penalties. Administrative penalties and other administrative measures should take into account factors such as any identified financial benefit resulting from the infringement, the gravity and duration of the infringement, any aggravating or mitigating factors, the need for administrative fines to have a deterrent effect and, where appropriate, include a discount for cooperation with the resolution authority or the competent authority. The adoption and publication of administrative penalties should respect fundamental rights as laid down in the Charter.

(81) In order to ensure consistent harmonisation and adequate protection for market participants across the Union, the Commission should be empowered to adopt draft regulatory technical standards developed by ESMA by means of delegated acts pursuant to Article 290 of the Treaty on the Functioning of the European Union (TFEU), in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010 to specify the following elements: (a) the content of the written arrangements and procedures for the functioning of the resolution colleges; (b) the methodology for calculation and maintenance of the amount of the additional pre‐funded dedicated own resources to be used by the CCP in recovery and the procedures, where such own resources are not available, for the CCP to resort to recovery measures that require contributions of non‐defaulting clearing members and to subsequently reimburse such clearing members; (c) the assessment methodology for recovery plans; (d) the contents of resolution plans; (e) the order of allocation, maximum period and maximum share of the CCP’s annual profits under the recompense mechanism in recovery; (f) elements relevant to the conduct of valuations; (g) methodology for calculating the buffer for additional losses to be included in provisional valuations; (h) the minimum elements that should be included in a business reorganisation plan; (i) criteria that a business reorganisation plan is to fulfil; (j) the methodology for final valuation under the ‘no credit worse off’ principle; (k) the conditions for clearing members to pass on compensation to their clients in line with the contractual symmetry principle and the conditions under which it is to be considered proportionate.

(82) The Commission should be able to suspend any clearing obligation established pursuant to Article 5 of Regulation (EU) No 648/2012, following a request from the resolution authority of a CCP under resolution or its competent authority, on their own initiative or at the request of the competent authority responsible for the supervision of a clearing member of the CCP under resolution, and following a non‐binding opinion by ESMA, for a specific type of counterparty or for specific classes of OTC derivatives which are cleared by a CCP under resolution. The decision to suspend the clearing obligation should be adopted only if it is necessary to preserve financial stability and market confidence, in particular to avoid contagion effects and to prevent counterparties and investors having high and uncertain risk exposures to a CCP. In order to adopt its decision, the Commission should take into account the resolution objectives, the criteria stated in Regulation (EU) No 648/2012 for subjecting OTC derivatives to the clearing obligation regarding those OTC derivatives for which the suspension is requested and whether it is necessary to suspend the clearing obligation in order to preserve financial stability and the orderly functioning of financial markets in the Union. ESMA should be able to request the Commission to suspend the trading obligation laid down in Regulation (EU) No 600/2014 of the European Parliament and of the Council (11) where it considers the suspension of the clearing obligation to be a material change in the criteria for the trading obligation. The suspension should be of a temporary nature with a possibility of extension. Likewise, the role of the CCP’s risk committee, as set out in Article 28 of Regulation (EU) No 648/2012, should be enhanced to further encourage the CCP to manage its risks prudently and improve its resilience. Members of the risk committee should be able to inform the competent authority when the CCP does not follow the risk committee’s advice, and representatives of clearing members and clients on the risk committee should be able to use information provided to monitor their exposures to the CCP, in accordance with confidentiality safeguards and without prejudice to the limitations to the exchange of such information laid out in competition law. Finally, resolution authorities of CCPs should also have access to all necessary information in trade repositories. Regulation (EU) No 648/2012 and Regulation (EU) 2015/2365 of the European Parliament and of the Council (12) should therefore be amended accordingly.

(83) In order to ensure the proper implementation of the interest rate benchmark reform of the FSB it is necessary to provide clarity to market participants that transactions entered into or novated before the entry into application of the clearing or margin requirements to OTC derivative transactions referencing an interest rate benchmark (legacy trades) will not be subject to the requirements as provided for in Regulation (EU) No 648/2012 when they are novated for the sole purpose of implementing or preparing for the implementation of the interest rate benchmark reform. Doing so should also prevent any risk that Union counterparties to those legacy trades find themselves unprepared when a specific benchmark is materially changed or discontinued, therefore alleviating related financial stability concerns. Such approach is in line with the international guidance from the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO).

(84) In order to implement resolution of CCPs effectively, the safeguards provided for in Directive 2002/47/EC of the European Parliament and of the Council (13) should not apply to any restriction on the enforcement of a financial collateral arrangement or on the effect of a security financial collateral arrangement, any close‐out netting or set‐off provision provided for in this Regulation.

(85) Directives (EU) 2017/1132 (14), 2004/25/EC (15) and 2007/36/EC (16) of the European Parliament and of the Council contain rules on the protection of shareholders and creditors of CCPs that fall within the scope of those Directives. In a situation where resolution authorities need to act rapidly under this Regulation, those rules might hinder effective resolution action and application of resolution tools and powers by resolution authorities. Derogations under Directive 2014/59/EU should therefore be extended to actions taken pursuant to this Regulation. In order to guarantee the maximum degree of legal certainty for stakeholders, the derogations should be clearly and narrowly defined, and should only be used in the public interest and when resolution triggers are met.

(86) In order to avoid duplication of requirements, Directive 2014/59/EU and Regulation (EU) No 806/2014 of the European Parliament and of the Council (17) should be amended to exclude from their scope those entities that are also authorised in accordance with Regulation (EU) No 648/2012.

(87) Article 54(2) of Regulation (EU) No 600/2014 provides for a transitional period during which Article 35 or 36 of that Regulation would not apply to those CCPs or trading venues which applied to their competent authority to benefit from the transitional arrangements, in respect of exchange‐traded derivatives. The transitional period during which a trading venue or a CCP can be exempted by its national competent authority, in respect of exchange‐traded derivatives from the application of Articles 35 and 36 of that Regulation expired on 3 July 2020. The current market environment, with a high degree of uncertainty and volatility driven by the COVID‐19 pandemic, negatively impacts CCPs and trading venues’ operations by increasing their operational risks. Those increased risks, combined with limited capacity for assessing access requests and for managing the migration of transactions flows, might impact the orderly functioning of markets or financial stability. In addition, that Regulation provides for a novel exchange‐traded derivatives regime on access to critical market infrastructures which aims to balance more competition amongst those infrastructures with the need to preserve their operational integrity. Therefore, while that Regulation seeks to create a competitive market for financial infrastructures, economic operators should not expect that existing rules and priorities are maintained when economic circumstances change as a consequence, in particular, of a major economic crisis. This is particularly the case in an area where the interaction between critical market infrastructures, such as trading and clearing infrastructures, requires an exceptional level of operational resilience, as any failures in such critical infrastructures would pose a high risk to financial stability. As a consequence of the COVID‐19 pandemic, the application date of the new open access regime for trading venues and CCPs offering trading and clearing services in relation to exchange‐traded derivatives is postponed by one year, until 3 July 2021.

(88) In order to ensure that resolution authorities of CCPs are represented in all relevant fora, and to ensure that ESMA benefits from all expertise necessary to carry out the tasks related to the recovery and resolution of CCPs, Regulation (EU) No 1095/2010 should be amended in order to include national CCP resolution authorities in the concept of competent authorities established by that Regulation.

(89) In order to prepare the decisions of ESMA in relation to the tasks allocated to it involving the development of draft technical standards on ex ante and ex post valuations and on resolution colleges and resolution plans, and of guidelines on the conditions for resolution, and on binding mediation, and to ensure the comprehensive involvement of the European Supervisory Authority (European Banking Authority) (EBA) and its members in the preparation of those decisions, ESMA should create an internal committee (the ‘ESMA Resolution Committee’) with resolution authorities as members. Where relevant, competent authorities defined in Regulation (EU) No 575/2013 of the European Parliament and of the Council (18), including the European Central Bank, and resolution authorities as defined in Directive 2014/59/EU, including the Single Resolution Board established by Regulation (EU) No 806/2014, should be invited to participate as observers.

(90) The ESMA Resolution Committee should be consulted in the preparation of the conceptual framework for the assessments of the resilience of CCPs to adverse market developments, when this assessment includes the aggregate effect of CCP recovery and resolution arrangements on Union financial stability. In such cases, the ESMA Resolution Committee should also be consulted when the findings of such stress tests are being assessed.

(91) This Regulation respects the fundamental rights and observes the rights, freedoms and principles recognised by the Charter.

(92) When taking decisions or actions under this Regulation, competent authorities and resolution authorities should always have due regard to the impact of their decisions and actions on financial stability in other Member States and on the economic situation in other Member States where the CCP’s operations are critical or important for local financial markets, including where clearing members and, where relevant information is available, their clients are located and where linked trading venues and financial market infrastructures, including interoperable CCPs, are established.

(93) Since the objective of this Regulation, namely the harmonisation of the rules and processes for the recovery and resolution of CCPs, cannot be sufficiently achieved by the Member States, but can rather, by reason of the effects of a failure of any CCPs in the whole Union, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve that objective.

(94) The application of this Regulation should be deferred until … [18 months from the date of entry into force of this Regulation] to establish all essential implementing measures and to allow CCPs and other market participants to take the necessary steps for compliance purposes. However, the requirement for the CCP to use dedicated own resources in recovery and the provisions to recompense clearing members in the extraordinary case of applying variation margin gains haircutting in recovery, rely on the appropriate regulatory technical standards to be in place. It is therefore appropriate to extend the deferral of the date of application for such provision until … [24 months from the date of entry into force of this Regulation]. Additionally, certain provisions that apply to CCP recovery plans and the adoption and review of recovery plans, including the obligation to submit a recovery plan, should be applied from an earlier date, since all CCPs already have recovery plans, as required by the Principles for Financial Market Infrastructures published by the Committee on Payments and Market Infrastructures and the IOSCO. CCPs already authorised under Regulation (EU) No 648/2012 should take the appropriate steps to ensure that they will be able to submit their recovery plans to their competent authorities at the latest on … [12 months from the date of entry into force of this Regulation]. Those provisions related to recovery plans should be applied from … [12 months from the date of entry into force of this Regulation]. If the resolution authority had not been consulted on the recovery plan of the CCP, once the other provisions of this Regulation become applicable, the competent authority of the CCP should consult the resolution authority on the CCP’s recovery plan without delay. In order to ensure legal certainty for counterparties, the amendments to Regulation (EU) No 648/2012 intended to ensure the proper implementation of the FSB’s interest rate benchmark reform should apply from the date of entry into force of this Regulation.

(95) In order to ensure that increased operational risks stemming from the application of the open access regime for exchange‐traded derivatives do not endanger the orderly functioning of markets or financial stability and to avoid any discontinuity, it is necessary to retroactively apply the extension of such transitional periods from 4 July 2020 until 3 July 2021.

(96) This Regulation should ensure that CCPs have sufficient loss‐absorbing and recapitalisation capacity to ensure smooth and fast absorption of losses and recapitalisation with a minimum impact on financial stability while aiming to avoid an impact on taxpayers. Consistently with the internationally agreed principles for effective resolution regimes for financial institutions developed by the FSB, this Regulation should ensure that equity holders of a CCP absorb losses first in resolution in a way that minimises the risk of legal challenge by equity holders, on the basis that their losses in resolution are greater than the losses that they would have incurred under normal insolvency proceedings according to the ‘no creditor worse off’ principle. On 15 November 2018, the FSB published a consultation paper entitled ‘Financial resources to support CCP resolution and the treatment of CCP equity in resolution’. Based on the feedback received to that paper and further assessments, the FSB plans to issue guidance at the end of 2020 on how equity should be used in the event of resolution of CCPs in a manner that minimises the risk of legal challenge by equity holders resulting from the application of the ‘no creditor worse off’ principle. Following the publication of that guidance, the Commission should review the application of the rules laid down in this Regulation with regard to the write‐down of equity in resolution by taking into account those internationally agreed standards. In addition to this specific review, the Commission should review the application of this Regulation after five years from the date of its entry into force, inter alia by taking into account any further international developments. That general review should cover at least certain core matters related to the recovery and resolution of CCPs, such as financial resources available to resolution authorities to cover non‐default losses and the CCPs’ own resources to be used in recovery and resolution,

HAVE ADOPTED THIS REGULATION:

TITLE I

SUBJECT MATTER AND DEFINITIONS

Article 1 Subject matter This Regulation lays down rules and procedures relating to the recovery and resolution of central counterparties (CCPs) authorised in accordance with Regulation (EU) No 648/2012 and rules relating to arrangements with third countries in the field of recovery and resolution of CCPs.

Article 2 Definitions For the purposes of this Regulation the following definitions apply: (1) ‘CCP’ means a CCP as defined in point (1) of Article 2 of Regulation (EU) No 648/2012; (2) ‘resolution college’ means the college established pursuant to Article 4; (3) ‘resolution authority’ means an authority designated by a Member State in accordance with Article 3; (4) ‘resolution tool’ means a resolution tool as set out in Article 27(1); (5) ‘resolution power’ means any of the powers laid down in Articles 48 to 58; (6) ‘resolution objectives’ mean the resolution objectives laid down in Article 21; (7) ‘competent authority’ means an authority designated by a Member State in accordance with Article 22 of Regulation (EU) No 648/2012; (8) ‘default event’ means a scenario in which the CCP has declared in default: (a) one or more clearing members in accordance with the procedure set out in Article 48 of Regulation (EU) No 648/2012; or (b) one or more interoperable CCPs in accordance with the relevant contractual arrangements or with the procedure set out in Article 52 of Regulation (EU) No 648/2012; (9) ‘non‐default event’ means a scenario in which losses are incurred by a CCP for any reason other than a default event, including but not limited to, business, custody, investment, legal or operational failures or fraud, including failures resulting from cyber‐attacks; (10) ‘resolution plan’ means a resolution plan for a CCP drawn up in accordance with Article 12; (11) ‘resolution action’ means a decision to place a CCP under resolution pursuant to Article 22, the application of a resolution tool, or the exercise of one or more resolution powers; (12) ‘clearing member’ means a clearing member as defined in point 14 of Article 2 of Regulation (EU) No 648/2012; (13) ‘parent undertaking’ means a parent undertaking as defined in point (15)(a) of Article 4(1) of Regulation (EU) No 575/2013; (14) ‘third‐country CCP’ means a CCP the head office of which is established in a third country; (15) ‘set‐off arrangement’ means an arrangement under which two or more claims or obligations owed between the CCP under resolution and a counterparty can be set off against each other; (16) ‘financial market infrastructure’ or ‘FMI’ means a CCP, a central securities depository, a trade repository, a payment system or another system defined and designated by a Member State under point (a) of Article 2 of Directive 98/26/EC; (17) ‘trading venue’ means a trading venue as defined in point 4 of Article 2 of Regulation (EU) No 648/2012; (18) ‘client’ means a client as defined in point 15 of Article 2 of Regulation (EU) No 648/2012; (19) ‘O‐SIIs’ means other systemically important institutions as referred to in Article 131(3) of Directive 2013/36/EU; (20) ‘indirect client’ means an undertaking which has established indirect clearing arrangements with a clearing member within the meaning of the second subparagraph of Article 4(3) of Regulation (EU) No 648/2012; (21) ‘interoperable CCP’ means a CCP with which an interoperability arrangement has been established; (22) ‘recovery plan’ means a recovery plan drawn up and maintained by a CCP in accordance with Article 9; (23) ‘board’ means the administrative or supervisory board, or both, set up pursuant to national company law and in accordance with Article 27(2) of Regulation (EU) No 648/2012; (24) ‘supervisory college’ means the college referred to in Article 18(1) of Regulation (EU) No 648/2012; (25) ‘capital’ means capital as defined in point 25 of Article 2 of Regulation (EU) No 648/2012; (26) ‘default waterfall’ means default waterfall in accordance with Article 45 of Regulation (EU) No 648/2012; (27) ‘critical functions’ means activities, services or operations provided to third parties external to the CCP the discontinuance of which is likely to lead to the disruption of services that are essential to the real economy or to disrupt financial stability in one or more Member States due to the size, market share, external and internal interconnectedness, complexity or cross‐border activities of a CCP, with particular regard to the substitutability of those activities, services or operations; (28) ‘group’ means a group as defined in point 16 of Article 2 of Regulation (EU) No 648/2012; (29) ‘linked FMI’ means an FMI with which the CCP has entered into contractual arrangements, including interoperability arrangements; (30) ‘extraordinary public financial support’ means State aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), or any other public financial support at supra‐national level, which, if provided for at national level, would constitute State aid, that is provided in order to preserve or restore the viability, liquidity or solvency of a CCP; (31) ‘financial contracts’ means contracts and agreements as defined in point 100 of Article 2(1) of Directive 2014/59/EU; (32) ‘normal insolvency proceedings’ means collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator or an administrator normally applicable to CCPs under national law and either specific to those institutions or generally applicable to any natural or legal person; (33) ‘instruments of ownership’ means shares, other instruments that confer ownership, instruments that are convertible into or give the right to acquire shares or other instruments of ownership, and instruments representing interests in shares or other instruments of ownership; (34) ‘designated national macroprudential authority’ means the authority entrusted with the conduct of macroprudential policy referred to in Recommendation B1 of the Recommendation of the European Systemic Risk Board (ESRB) of 22 December 2011 on the macroprudential mandate of national authorities (ESRB/2011/3); (35) ‘default fund’ means a default fund maintained by a CCP in accordance with Article 42 of Regulation (EU) No 648/2012; (36) ‘pre‐funded resources’ means resources which are held by and freely available to the relevant legal person; (37) ‘senior management’ means the person or persons who effectively direct the business of the CCP, and the executive member or members of the board; (38) ‘trade repository’ means a trade repository as defined in point 2 of Article 2 of Regulation (EU) No 648/2012 or in point 1 of Article 3 of Regulation (EU) 2015/2365 of the European Parliament and of the Council; (39) ‘Union State aid framework’ means the framework established by Articles 107, 108 and 109 TFEU and regulations and all Union acts, including guidelines, communications and notices, made or adopted pursuant to Article 108(4) or Article 109 TFEU; (40) ‘debt instruments’ means bonds or other forms of unsecured transferable debt, instruments creating or acknowledging a debt, and instruments giving rights to acquire debt instruments; (41) ‘initial margin’ means margins collected by the CCP to cover potential future exposure to clearing members providing the margin and, where relevant, interoperable CCPs in the interval between the last margin collection and the liquidation of positions following a default of a clearing member or of an interoperable CCP; (42) ‘variation margin’ means margins collected or paid out to reflect current exposures resulting from actual changes in market prices; (43) ‘resolution cash call’ means a request for cash resources to be provided by clearing members to the CCP, additional to pre‐funded resources, based on statutory powers available to a resolution authority in accordance with Article 31; (44) ‘recovery cash call’ means a request for cash resources, other than a resolution cash call, to be provided by clearing members to the CCP, additional to pre‐funded resources, based on contractual arrangements laid out in the operating rules of the CCP; (45) ‘transfer powers’ means the powers specified in point (c) and (d) of Article 48(1) to transfer shares, other instruments of ownership, debt instruments, assets, rights, obligations or liabilities, or any combination of those items from a CCP under resolution to a recipient; (46) ‘derivative’ means a derivative as defined in point 5 of Article 2 of Regulation (EU) No 648/2012; (47) ‘netting arrangement’ means an arrangement under which a number of claims or obligations can be converted into a single net claim, including a close‐out netting arrangement under which, on the occurrence of an enforcement event (however or wherever defined), the obligations of the parties are accelerated so as to become immediately due or are terminated, and in either case are converted into or replaced by a single net claim, including a close‐out netting provision as defined in point (n)(i) of Article 2(1) of Directive 2002/47/EC of the European Parliament and of the Council and netting as defined in point (k) of Article 2 of Directive 98/26/EC; (48) ‘crisis prevention measure’ means the exercise of powers to require a CCP to take measures to remedy deficiencies in its recovery plan under Article 10(8) and (9), the exercise of powers to address or remove impediments to resolvability under Article 16, or the application of an early intervention measure under Article 18; (49) ‘termination right’ means a right to terminate a contract, a right to accelerate, close out, set‐off or net obligations or any similar provision that suspends, modifies or extinguishes an obligation of a party to the contract or a provision that prevents an obligation under the contract from arising that would otherwise arise; (50) ‘title transfer financial collateral arrangement’ means a ti