EUROPEAN COMMISSION Brussels, 28.11.2016 COM(2016) 856 final 2016/0365(COD) Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on a framework for the recovery and resolution of central counterparties and amending Regulations (EU) No 1095/2010, (EU) No 648/2012, and (EU) 2015/2365 (Text with EEA relevance) {SWD(2016) 368 final}

{SWD(2016) 369 final}



EXPLANATORY MEMORANDUM 1.CONTEXT OF THE PROPOSAL 1.1.Reasons for and objectives of the proposal A central counterparty (CCP) intervenes between participants in financial markets to act as the buyer to every seller and the seller to every buyer for a specified set of contracts. CCPs deal in financial transactions in various asset classes such as in equities, derivatives and repos. Their services are usually provided to their clearing members (typically banks) who have a direct contractual link with CCPs and the clients of the clearing members (e.g. pension funds). The concentration of transactions and resulting positions in CCPs allows those positions to be netted down and therefore considerably reduce total exposures of the CCP, as well as of its clearing members and their clients. In exchange for taking on and netting their positions, the CCP collects collateral (in the shape of ‘margin’ and contributions to default funds) from clearing members and their clients to cover its liabilities in case one of its participants defaults on its obligations vis-à-vis the CCP. By doing so, they manage the risks inherent in financial markets (e.g. counterparty risk, liquidity risk and market risk), and therefore improve the overall stability and resilience of financial markets. In the process, they become critical nodes in the financial system, linking multiple financial actors and concentrating significant amounts of their exposure to diverse risks. Effective risk management of the CCP and robust supervisory oversight is therefore key to ensure that such exposures are adequately covered. The scale and importance of CCPs in Europe and beyond is set to increase via the implementation of the G20 commitment to clear standardised derivatives transacted over-the-counter (OTC) through central counterparties. This obligation is implemented in the EU by the Regulation on OTC derivatives, central counterparties and trade repositories (‘EMIR’). That Regulation also sets out comprehensive prudential requirements for CCPs, as well as requirements regarding the operations and oversight of CCPs. While CCPs in the EU are thus subject to high standards in view of their central role in the economy and of the added risks they are assuming, no harmonised EU rules exist for the unlikely situations in which these standards would be overwhelmed and in which CCPs would face severe distress – beyond that envisaged by EMIR – or outright failure. In principle, failing corporations should be subject to insolvency proceedings. However, the past crisis clearly illustrated that the failure of an important financial institution which is highly interconnected with others in financial markets can cause critical problems for the rest of the financial system and negatively impact prospects for growth across the wider economy. This is because their insolvency may abruptly curtail the provision of an institution’s critical functions to the economy, triggering market panic and contagion due to counterparties and investors being unsure about their assets and liabilities in drawn-out legal proceedings. Faced with this threat to financial stability, caused for example by lack of confidence in the market, and the overall public interest, governments have often been compelled to bail out failing financial institutions with public money to prevent this from happening. Recovery and resolution constitute measures that aim to safeguard financial stability, ensure the continuity of critical functions and protect taxpayers in the event of the distress or failure of an institution that is experiencing financial difficulties, where insolvency proceedings would be insufficient to meet these aims. As such, the measures are designed to protect vital critical functions without exposing taxpayers to loss in order to preserve the ability of the financial system to fund economic growth and avoid the socio-economic costs of a financial meltdown. Recovery and resolution measures are most relevant where a financial institution is “systemic”, whereby because of its size, market importance and interconnectedness, for example, its distress or disorderly failure would jeopardise the normal functioning of the financial system, which would in turn adversely impact the real economy. While CCPs are already well-regulated, have robust resources to deal with financial distress under EMIR and have not undergone distress or failed in large numbers in the past, the challenge posed by their growing importance in processing increasing amounts of new types of risk is widely recognised by governments, authorities and other market participants. Considering their central and growing role in financial markets, all CCPs in the EU are therefore considered to be systemic. Recovery measures are those which a financial institution itself takes to restore its long-term viability. Ensuring the right conditions for recovery measures to succeed is a key policy objective for CCPs, as their failure is considered to be potentially highly disruptive for the wider financial system. However, authorities acting in the public interest should also have powers to resolve a CCP if these measures fail or could damage financial stability. Resolution measures constitute extraordinary steps which authorities would be able to take to swiftly restructure CCPs and secure the continuity of their functions that are critical to the economy, thereby mitigating the damage to the financial system and the broader economy, while placing the residual parts of the CCP in insolvency, ensuring market efficiency. In the process, costs and losses are imposed as far as possible on the CCP’s owners and creditors, not the taxpayer, in line with how they would be treated if the CCP had entered insolvency and in full respect of the Charter of Fundamental Rights, the relevant case-law of the Court of Justice of the European Union, and the European Convention on Human Rights. Resolution does not aim to prevent the failure of inefficient institutions; rather it aims to maintain the critical functions of an institution, while allowing the remaining parts to be wound down in an orderly manner. The analysis for the need to respond to the possible recovery and resolution of other financial firms than banks and CCPs has not progressed at the same pace. This is mainly due to the lessons learned during the financial crisis which did not demonstrate an equally urgent need for such measures. However such measures may be necessary in the future, taking account of the development of economic and financial risk in the sectors concerned. Furthermore, specific and wider international work on insurance undertakings at G20-level is also in its relatively early stages of recommendations and few jurisdictions have on practice introduced regulatory reform in this area. Within the EU, to date three Member States have introduced legislation on the recovery and resolution of insurance undertakings or are in the process of doing so. EIOPA has engaged in a thorough, comparative and wide-ranging review of national recovery and resolution practices and developments in this area and is set to present a report on this topic in the first half of 2017. On the basis of that report, the Commission will consider the appropriate way forward, in close consultation with the European Parliament, Council and all relevant stakeholders. 1.2.Consistency with existing provisions in the policy area A comprehensive EU recovery and resolution framework has already been adopted for banks and investment firms. The proposed framework for CCPs neither duplicates this regime nor the requirements of EMIR but complements them. It sets out provisions comparable to those in the framework applicable to banks and investment firms to facilitate orderly recovery and resolution, but adapts them to the specific features of CCPs’ business models and the risks they incur, including by determining how losses would be shared in scenarios where existing CCPs’ pre-funded resources required under EMIR are exhausted. More broadly, at the international level, G20 leaders have endorsed an approach developed by the Financial Stability Board (FSB) to address the risks which the failure of any financial institution (bank, financial-market infrastructure, insurance undertaking, etc.) of global systemic relevance could have on the financial system via comprehensive and appropriate recovery and resolution tools. Furthermore, the Committee on Payment and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) have developed guidance on recovery plans for financial-market infrastructures, including CCPs, while the FSB has issued further guidance on the application of its Key Attributes of Effective Resolution Regimes to financial market infrastructures, such as CCPs, as well as insurers. In mid-2016, these organisations consulted further on key parts of this guidance, including on issues such as the timing of when resolution authorities should place a CCP into resolution because its viability and financial stability are at stake, and which powers and tools the resolution authority should employ at this point to best secure the continuity of critical functions, minimise contagion and allocate costs and losses in the most efficient way possible. Finally, in December 2013 the European Parliament adopted an own-initiative report calling on the Commission to propose appropriate EU measures to ensure that the impacts of a potential failure of key financial institutions, most notably CCPs, could be mitigated. 1.3.Consistency with other Union policies A proposal to create a European framework for the recovery and resolution for CCPs was signalled in the Commission’s Work Programme for 2015 and a roadmap on the initiative was published in April 2015. In order to take account of the further refinement of the relevant international guidance mentioned in the previous section, the initiative was carried over into the Work Programme for 2016. The initiative is part of the Commission’s efforts to ensure that threats to the smooth functioning of the financial system and to taxpayers are tackled and that financial markets can continue to play their role in contributing to sustainable, long-term growth to further deepen the internal market in the interests of consumers and businesses. 2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 2.1.Legal basis

The legal basis for this proposal is Article 114 of the Treaty on the Functioning of the European Union (TFEU), which allows the adoption of measures for the approximation of national provisions which have as their object the establishment and functioning of the internal market. The proposal harmonises national laws on recovery and resolution of CCPs to the extent necessary to ensure that CCPs are subject to similar tools and procedures to address their possible distress or failure. At present, while authorised CCPs are able to operate and provide services across the EU, the regulatory landscape for managing potential crises exceeding the requirements of EMIR is fragmented. Some Member States have enacted requirements for CCPs to prepare contingency plans against their distress or cover CCPs as part of broader resolution regimes for the financial sector designed primarily for banks. No Member State has yet developed a full national regime for CCP recovery and resolution which fully complies with the G20-endorsed FSB principles, including as regards the need for effective coordination and oversight against cross-border spill-overs. Without an EU-level framework, Member States are unlikely to develop comprehensive and compatible regimes. The divergent approaches by which CCPs and authorities would mitigate or tackle CCP distress or failure would not be fully coherently planned and could be inconsistently applied. This could lead to the disruption of critical functions to clearing members and clients across borders and to wider financial instability. EU level action is therefore necessary to adequately equip Member State authorities with tools and powers that would be enforced in an expedient, coherent and equal fashion across the Union. EU-level action is warranted also for CCPs that have fewer direct cross-border links, but where harmonisation would mitigate possible level playing-field and competition concerns arising from the prospective and actual national handling of a CCP failure. For example, national regimes with different degrees of potential state intervention with public funds would result in an un-level playing-field in favour of those CCPs based in Member States where support is more likely. The experience with bank failures in different Member States underlines how problems at systemic financial institutions can fragment the Single Market into national economic zones. Market perceptions and biases in favour of entities located in jurisdictions with relatively stronger implied backing by the state can cause competitive distortions and arbitrarily influence costs for businesses depending on their geographic location and the perceived appetite of, or necessity for, a Member State to pre-emptively ring-fence assets, liquidity or capital to minimise cross-border exposures. While the risk of this type of fragmentation of the Single Market in case of CCPs is less imminent, differing perceptions and uncertainty over the ability of Member States to take control of a failed CCP and resolve it effectively could undermine market participants' trust in and thereby the integrity of, the functioning of the Single Market. Indeed, the uncertainty over how the failure of key market infrastructures could be managed in the absence of common EU-rules is cited as one reason for the lag in the pace of integration in Europe’s capital markets. The harmonisation of requirements applicable to CCPs would improve the level playing-field for economic operators and help boost the integration of the internal market. By ensuring that all relevant Member State authorities have the same minimum tools to ensure the orderly recovery and resolution of CCPs and by facilitating cooperation between authorities, so as to mitigate any cross-border spill-over effects when dealing with their distress or failure, the harmonised framework would also enhance financial stability across the internal market and prevent outcomes in which Member States would be compelled to act alone, and in uncoordinated fashion, in relation to operators established in their jurisdiction. Article 114 of the TFEU is, therefore, the appropriate legal basis. 2.2.Subsidiarity Under the principle of subsidiarity set out in Article 5(3) of the Treaty on European Union (TEU), in areas which do not fall within its exclusive competence, the Union should act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level. EU financial markets are open and integrated. CCPs are able to operate cross-border within the markets and product lines they serve. In the process, they link multiple financial actors, counterparties and clients across borders throughout the single market. Due to this advanced and multi-layered cross-border integration of the financial sector, an EU resolution and recovery framework is needed that mirrors the level of integration of the business. Current tools to deal with CCPs that face a crisis are limited to CCPs’ internal arrangements or are, where developed, nationally based. This means that there are potentially divergent approaches by which CCPs and authorities mitigate or tackle the problems within a CCP facing financial distress or on the verge of failure, which could ultimately lead to the disruption of critical functions for the economy, fragmentation of the internal market and wider financial instability. The failure of a CCP operating beyond national borders, which is true of the majority of cases, is likely to affect, to differing degrees, the stability of financial markets in the Member States in which it operates. Only EU action can ensure that CCPs and their clearing members (which can be located in different Member States to the CCP) are subject to adequate and effective intervention to mitigate or address a crisis situation in a coordinated and coherent manner. Therefore, to secure these objectives at the Union-level and at the level of Member States, it is appropriate that the Union should develop the necessary legislative framework. 2.3.Proportionality Under the principle of proportionality, the content and form of Union action should not exceed what is necessary to achieve the objectives of the Treaties. In principle, a failed CCP should be subject to insolvency procedures like any other business. However, CCPs are central financial infrastructures which are highly interconnected with, and centralise risk on behalf of, myriad financial actors. As such, depriving these actors of the critical services provided by a CCP could create serious consequences for financial stability and the wider economy. To mitigate this, it is justified to require adequate contingency plans for orderly recovery and resolution and to grant authorities resolution powers to swiftly restructure their operations if necessary. As the systemic importance of a CCP failure cannot be determined with full certainty in advance, the proposed framework should apply in principle to all CCPs, irrespective of their size and complexity. The majority of CCPs established in the EU provide services to clearing members and clients across the EU and some beyond, and their distress or failure could thus resonate globally. Recovery and resolution plans should thus be tailored to the specific risk-profile of each CCP. The exercise of any extraordinary actions by the authority to preserve financial stability and protect taxpayers would also always have to be fully justified and proportionate, not go beyond what is necessary to achieve the objectives, and be consistent with the Charter of Fundamental Rights as interpreted by the Court of Justice of the European Union as regards any limitations to the right of property which the powers may entail. Finally, they would be conducted in such a way as to ensure that affected stakeholders are treated no worse than if the CCP had not been resolved but would have been subject to further possible actions under the CCP's operating rules for allocating losses or gone into insolvency. 2.4.Choice of instrument Article 114 TFEU allows the adoption of acts both in the shape of Regulations or Directives. The adoption of a Regulation is retained here for the following reasons. First, a Regulation would best complement and build on the approach established by EMIR which provides the requirements for CCPs in the field of prudential regulation. The new requirements for CCPs to set out comprehensive recovery arrangements build on the objectives and provisions of EMIR to ensure that CCPs are resilient. Setting these out in another legal form (namely a Directive) would be inconsistent and require Member States to adopt laws in a specific part of an area otherwise governed by directly applicable EU law. The provisions for authorities to have targeted powers and tools to carry out, where necessary, effective and orderly resolution to maintain financial stability if the requirements under EMIR and the recovery arrangements fail are no longer concerned with furthering the going-concern resilience of CCPs but do involve securing the viability of their critical functions in a way whereby operation of these functions (in the same legal entity or in another form) continues to meet the requirements and objectives of EMIR. Accordingly the provisions governing how to achieve this should be framed in the same legal form as EMIR. Second, a Regulation would best deliver a common approach and a single rulebook for authorities and would avoid divergence between national rules and the possible legal uncertainties which this can entail notably in cross-border contexts as outlined above. It would also facilitate international cooperation, where relevant, and make it easier to do business with and in the EU, as the system in the EU would be uniform. Moreover, considering that the impact of a EU CCP failure could potentially have consequences for the financial system of all EU Member States, such a uniform framework would alleviate any damaging uncertainties about the conditions in which such a failure would be dealt with by the relevant authorities of CCPs in different Member States and help reassure stressed markets. Third, because of their business models the likelihood of a CCP failure is generally understood to be far lower than for banks. In contrast to banks of various sizes and risk profiles, the failure of which can arise in different scenarios, assume varying proportions and consequently require a wider array of resolution tools (and derogations), CCP-failure is more likely to occur for reasons which are known upfront (defaults by clearing members or severe operational failure) and which can be managed with a more distinct set of tools. Therefore, this more limited applicability and need to cater for as large a variety of options entails that the objectives can be better served via a Regulation, albeit that some flexibility is necessary to allow authorities to react to the circumstances of the case. Finally, compared to EU banks EU CCPs represent a far smaller number of entities and the corporate structures of CCPs and the way in which they provide services across borders differ from those of cross-border banking groups. In the latter case, subsidiaries and branches are often set up in various jurisdictions to serve customers, acquire assets, obtain funds etc., justifying a greater degree of sensitivity for local laws in the implementation of resolution decisions. In the case of CCPs, the provision of services happens in a less dispersed way, centrally from one jurisdiction into others without the intermediation of subsidiaries or branches. This favours adopting a Regulation to ensure the uniform application of decisions across jurisdictions. 3.RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS 3.1.Stakeholder consultation A public consultation on a possible recovery and resolution framework for non-bank institutions was carried out between 5 October and 28 December 2012. It asked questions about the need for recovery and resolution arrangements mainly in relation to CCPs, central securities depositories and insurance undertakings. 67 replies were received.

On the whole, the consultation indicated that the priority should be to develop an EU-wide recovery and resolution framework for CCPs. The implementation of the G20 requirement for standardised OTC derivatives to be centrally cleared was recognised as a compelling argument in favour of taking action. Respondents generally agreed that, like the BRRD for banks, a framework for CCPs should ensure continuity of their critical functions, minimise exposure to losses for taxpayers from their failure and improve legal certainty for their clearing members and clients. Almost all stakeholders agreed that, in order to safeguard financial stability, the continuity of key operations of CCPs should be the priority. Many considered that while it is critical to ensure that recovery and resolution arrangements for CCPs are credible and robust, these should not place excessive burdens on members or participants to cover potentially significant liabilities arising from the default of a major clearing member or, even less, from internal risk management errors by the CCP. Stakeholders generally noted that this necessitated tailoring the BRRD tools to the specificities of CCPs’ business models. 3.2.Collection and use of expertise In addition to stakeholder-consultation, the Commission participated in the discussions and exchange of views informing the CPMI/IOSCO report providing guidance on the recovery of financial market infrastructures. The Commission also participated in the work relating to the resolution of other non-bank financial institutions carried out by the FSB, including the latest discussions on refining parts of this guidance to help authorities plan effective resolution strategies. On their part, in elaborating the reports proposing guidance on (respectively) recovery and resolution, both CPMI/IOSCO and FSB asked interested parties to provide comments on their draft guidance documents and published the responses received. On the whole, these international level consultations for financial market infrastructures confirm the views expressed in the Commission’s own consultation, and provide useful additional feedback on the relative merits of some of the proposed policy options and resolution tools. Commission services also held four meetings with Member States' experts to discuss the international work being carried out by the FSB and CPMI-IOSCO, the most contentious policy choices, and the scope and nature of the proposal. Member State experts generally agreed with the policy direction proposed by the Commission, based on the international guidance and building on EMIR and the BRRD as relevant. 3.3.Impact assessment The Commission conducted an impact assessment of relevant policy alternatives. Policy options were assessed against the key objectives of safeguarding financial stability and confidence in CCPs, minimising losses for society as a whole and in particular for taxpayers and strengthening the Single Market for services provided by CCPs, while maintaining a level playing field. The Impact Assessment (IA) was approved by the Impact Assessment Board (IAB) on 6 May 2015. The IAB made a number of recommendations for improvements. Taking into account these recommendations, the IA was further refined. In particular, the justification on the need for action at EU level and the identification and the assessment of the options were further substantiated. The options assessed and the conclusions reached were also checked against the latest guidance from the ongoing international work, which the Commission followed closely. The legislative proposal is fully in line with the latest FSB and G20 policy discussions and orientation. Regarding the need for action at EU level, the IA concluded that EU action is necessary given the cross-border nature of CCPs' business, which links multiple financial actors, counterparties and clients throughout the Single Market. The tools currently available to Member State authorities are inadequate to deal with CCPs that face significant stress which could compromise their viability. Divergent approaches across Member States to mitigate or tackle potential severe problems of CCPs could ultimately lead to the disruption of critical functions for the economy and wider financial instability. Acting at EU level is necessary to adequately equip Member State authorities with tools and powers that would have enforceability across the Union, to deal with the failure of CCPs located within their jurisdictions, and to ensure effective communication amongst all relevant authorities, whether in the same or in different Member States. Appropriate recovery and resolution planning should help ensure that costs are not borne by taxpayers but rather by the market participants associated with the CCP (creditors, clearing members, their clients) in a proportionate and non-discriminatory manner. Regarding the question of how resolution of CCPs can be ensured in a timely and robust manner, the IA examined options relating to possible triggers as to when to enter into resolution and options relating to which resolution tools and powers authorities should be equipped with. The IA found that prescriptive triggers for resolution, such as the breach of specific requirements, would bring transparency to the resolution framework by making clear ex-ante to all stakeholders when a possible public intervention might be prompted. Prescriptive triggers would nevertheless not be suitable as it would be difficult to identify single or compound indicators that can clearly predict future events compromising financial stability. Prescriptive triggers could also leave undue room for entities to "game the system", i.e. take measures around the triggers that would compromise the trigger's validity; moreover, CCPs could fail in a way that may not meet specific prescriptive conditions, and therefore resolution would not be available as an option to achieve an orderly restructuring or wind down. More flexible triggers that leave the decision on entry into resolution to authorities avoid these problems and provide authorities with the power to take quick and decisive action to resolve any systemically important CCP that is failing or likely to fail before it has become insolvent. The IA concluded that more flexible triggers are the preferred option; however, it highlighted that it is essential to ensure that authorities will only use resolution tools if a CCP is close to failure and no other measures can restore its viability and ensure overall financial stability, and most importantly that it would be in the public interest to place the CCP into resolution, rather than subjecting it to normal winding up or insolvency proceedings. As regards resolution tools and powers, the IA concluded that resolution authorities should be equipped with a harmonised but not exhaustive and not prescriptive resolution toolkit that affords authorities the necessary discretion to take into account the circumstances of a potential crisis. Conceivable paths of how to potentially resolve an entity in various scenarios would be laid out in non-binding resolution plans. The alternative option of equipping authorities with a comprehensive, exhaustive toolkit and setting out the order in which the tools should be used was rejected as it could risk the effectiveness of resolution by limiting authorities' ability to respond in a flexible way to the specific circumstances of an evolving crisis situation. It was considered unlikely that perfectly matched resolution tools and a hierarchy of their use could be developed to address all conceivable crisis scenarios, which would risk that envisaged resolution measures would not be appropriate to deal with the concrete problems at stake. With regard to specific tools, the IA found that making the tools set out under the international guidelines comprehensively available in both recovery and resolution would minimise any costs borne by the taxpayer and would best achieve ex-ante market discipline. They would also enable distributing losses to all CCP stakeholders in a manner that provides certainty to market participants in advance and is as equitable as possible. Market participants could be impacted differently by the various options, but a key aim of resolution is that they are no worse off than if the CCP had not been resolved but they would instead have been subject to further possible actions under the CCP's operating rules for allocating losses or if the CCP had entered insolvency. Some other tools, such as requesting CCPs and clearing members to build up additional pre-funded means to absorb losses and replenish resources, were not considered to improve market discipline effectively or were deemed to be disproportionately costly in view of the low likelihood of being used. Overall, the preferred options were thus considered to contribute positively to maintaining financial stability and confidence in the broader financial system, without imposing undue or excessive costs which could weigh heavily on broader economic growth. 3.4.Fundamental rights Like the BRRD before it, the framework for CCPs is fully compatible with the Charter of Fundamental Rights. While resolution action may entail changes to the assets and rights of CCPs’ owners and clearing participants, in accordance with Article 52 of the Charter, limitations on some rights and freedoms are allowed. As required by the Charter, such limitations on the exercise of these rights and freedoms are provided for by the Regulation, they respect the essence of these rights and freedoms, and they are only applied where genuinely necessary to meet the objectives of general interest recognised by the Union. The protection of financial stability has been recognised by the Court of Justice as a general interest, justifying restrictions to fundamental rights and freedoms under the Treaty provided that they are proportionate and suitable to reach the objectives they pursue. Affected stakeholders can also appeal specific elements of resolution decisions which impact them and are entitled to compensation in case they are left worse off than they would have been if the CCP had not been resolved but they would have been subject to further possible actions under the CCP's operating rules for allocating losses or the CCP had entered insolvency. 3.5.BUDGETARY IMPLICATION The above policy options will have no implications for the budget of the Union. The present proposal would require ESMA to (i) develop 5 technical standards and 2 guidelines, and (ii) take part in resolution colleges (together with EBA), make decisions in case of disagreement and exercise binding mediation. The delivery of technical standards is due 12 months after the entry into force of the Regulation. The proposed tasks for ESMA will not require the establishment of additional posts and can be carried out with existing resources, in most cases based on work already done by EBA in the context of BRRD implementation. The tasks for ESMA would also be prepared by a newly established ESMA resolution committee where relevant EBA competent authorities shall be invited to participate as observers, maximising use of existing resources.

4.OTHER ELEMENTS 4.1.Implementation plans and monitoring, evaluation and reporting arrangements After entry into force, the preparation and development of proportionate recovery and resolution plans and the measures implemented by CCPs and authorities based on these plans is a tangible medium-term indicator for follow-up. In the event of distress affecting a CCP, other indicators to monitor would be whether, when and how CCPs are activating their recovery plans and whether, when and how supervisory authorities are taking action in accordance with the early intervention powers granted by the framework. Finally, in the event of CCP-failure and of the resolution conditions being met, the indicators to monitor would be when resolution authorities intervene, which tools they use, and how any losses are shared among private stakeholders. An examination of the functioning of specific provisions as well as a more general review could be carried out after three years. The monitoring and evaluation frameword could be refined in this context as appropriate, building on concrete experience with the regime. 4.2.Detailed explanation of the specific provisions of the proposal 4.2.1.Scope and objectives In view of their function and central role in financial markets, the scope covers all CCPs established in the EU. The relevant powers and tools bestowed by the Regulation would thus be available for use in relation to all CCPs irrespective of their size, interconnectedness or other characteristics. Proportionality would nonetheless be assured as recovery and resolution plans are to be specific to each CCP and take due account of their systemic relevance. The exercise of the early intervention and resolution powers by authorities should, in all cases, also be proportionate and justified. The objectives are, first, to seek the orderly recovery of CCPs in various scenarios of financial distress through the implementation of robust and comprehensive recovery plans, agreed between the CCP and its clearing members. Second, if this were to be insufficient and the conditions for resolution were to be met, authorities should take swift action in order to safeguard financial stability, secure the continuity of the CCP’s critical functions, and protect taxpayers to the maximum extent. In case of resolution, action by the authority should be predicated on the owners, creditors and counterparties of CCPs bearing losses in line with the hierarchy of claims in insolvency, and managers being replaced and held accountable for any wrong-doing under national law. Due to their legal and corporate structure, effective CCP recovery and resolution does not necessarily need to encompass the wider groups of which CCPs may form part. However, where expedient to achieve the objectives above, specific powers can apply to the parent companies of CCPs. These include for instance the option for authorities to decide on a case-by-case basis that recovery plans should cover parent companies. 4.2.2.Set-up of resolution authorities and resolution colleges Resolution authorities for CCPs shall be set up and equipped with a harmonised set of powers to undertake all the relevant preparatory and resolution actions below. The authorities can be central banks, competent ministries, the competent authorities (i.e. supervisors) of CCPs or other public administrative authorities. In case the powers are assigned to an existing authority, appropriate operational independence should be in place for the resolution functions. In case of multiple authorities possessing these powers, tasks should be clearly allocated. The appointed body(ies) are to have statutory tasks in order to ensure the orderly resolution of CCPs where the conditions for resolution are met, in a way which protects financial stability and taxpayers. It is not excluded that the authority can have similar duties in relation to other financial institutions. Where required under national law in a Member State, courts can be involved in approving the decision to resolve a CCP, provided that the procedure is expeditious. Considering the role and precedent set by EMIR for colleges and for their tasks, as well as the possible impacts which resolution actions can have on clearing members and other stakeholders, CCPs’ resolution authorities are required to set up and chair resolution colleges for each CCP. These largely mirror the composition of the colleges in EMIR. In addition to the CCP’s resolution authority, members of the college should therefore include the competent authorities of the clearing members, CCPs, central securities depositories and trading venues present in the EMIR college, as well as the relevant central banks, and ESMA. In addition, other members should include, the resolution authorities of the clearing members whose competent authorities are members, if different, the relevant competent authority of any parent undertaking to which recovery plans would apply, as well as any competent ministries afforded a specific role in the resolution of CCPs, and EBA. The existing colleges under EMIR and the newly set-up resolution colleges should jointly undertake the specific tasks allocated to them under this Regulation, as described below. 4.2.3.Preparation – recovery plans CCPs are required to prepare recovery plans to overcome any form of financial distress which would exceed their default management resources and other requirements under EMIR. This should include scenarios involving defaults by clearing members (i.e. default events) as well as the materialisation of other risks and losses (i.e. other (non-default) events). The precise circumstances in which the plans should be triggered would not be fixed in the law but CCPs are required to develop suitable indicators informing clearing participants and authorities for when this would occur. The plans should not rely on any extraordinary public financial assistance but should outline how possible access to central bank facilities under standard terms could be obtained. In line with the CPMI-IOSCO guidance, the plans should be comprehensive, effective, transparent and measurable for those potentially impacted by them, set appropriate incentives and minimise negative impacts for all stakeholders and the financial system more broadly. Subject to these principles, CCPs can determine the appropriate range of options and recovery tools. These include tools to re-match the CCP’s book through tearing up contracts, such that the contracts are terminated and the losses and gains are crystallised, establishing voluntary agreements such as auctions with the remaining clearing members such that they voluntarily take on positions, or to arrange for additional resources by requiring clearing members to provide additional resources subject to a cap ("cash calls") and haircutting payments due to clearing participants as a result of an economic gain in a derivatives contract (“variation margin haircutting”). The Regulation neither determines which specific options recovery plans should contain nor excludes others. However, it requires that the plans should constitute arrangements agreed between CCPs and their clearing members in order to reinforce their effectiveness in all cases, binding or committing clearing members to act in accordance with the pre-agreed operating rules in case they are activated regardless of the jurisdiction in which they are based. Clearing members are required to fully inform their clients how they would transmit any losses or costs arising from the exercise of recovery tools by the CCP to them. Recovery plans are to be reviewed by the competent authority of the CCP. Considering the possible impacts of the plan on clearing members and other stakeholders, the college set up under EMIR should be associated in the process. For instance, the assessment of the plan’s adequacy should be subject to a joint decision by the college. In case a joint decision cannot be reached, binding mediation could be carried out by the European Securities and Markets Authority (ESMA), in line with its mandate (Article 19(3) of Regulation (EU) No 1095/2010). 4.2.4.Preparation – resolution plans and resolvability assessments Resolution authorities are required to prepare resolution plans for how CCPs would be restructured and their critical functions kept alive in the event of their failure. As in the case of recovery plans, they should cover both default events and other (non-default) event scenarios, and should not assume any extraordinary public financial support besides access to central bank facilities under standard terms. The plans should outline the resolution powers and tools which authorities would employ in case a CCP meets the conditions for resolution, proportionate to and in full consideration of the business model, market share and systemic relevance of the CCP both in the jurisdiction in which it is established as well as in other Member States and third countries. The plan is not binding, but any departure from it at the point of resolution should be duly justified by the authority. As part of resolution planning, resolution authorities should also assess the overall resolvability of the CCP and address any impediments thereto. Consequently, they should have powers requiring the CCP to, for example, change specific business practices or its operational or legal structures, revise any intra-group agreements which could hamper resolution, or increase its pre-funded loss-absorbing resources on a case-by-case basis. As in the case of recovery plans, the possible impacts of actions on clearing members and stakeholders means that resolution colleges should be associated in drawing up the resolution plan and in agreeing to any measures to address resolvability. For instance, the resolution college should be required to reach a joint decision in both cases, failing which binding mediation by ESMA could be carried out. 4.2.5.Early intervention

Competent authorities are granted specific powers to intervene in the operations of CCPs where their viability is at risk but before they reach the point of failure or where their actions may be detrimental for overall financial stability. The powers would complement those in EMIR, constituting specific supervisory options in these circumstances. Notably competent authorities could require the CCP to undertake specific actions in its recovery plan, or to refrain from taking such action. 4.2.6.Resolution triggers A CCP should be placed in resolution when it is failing or likely to fail, when no private sector alternative can avert failure, and when its failure would jeopardise the public interest and financial stability. In addition, in line with the guidance of the Financial Stability Board Key Attributes for Effective Resolution Regimes, a CCP could be placed into resolution even if not all of these conditions are met, where the application of further recovery measures by the CCP could prevent its failure but could compromise financial stability in the process. Except for very specific circumstances, the CCP should also be considered to be failing or likely to fail if it requires extraordinary public financial support. The resolution authority would assess whether all conditions are met. The assessment of the first condition (whether the CCP is failing or likely to fail) should however be the primary responsibility of the competent authority. It is generally considered that competent authorities are more likely to have a detailed understanding of the CCP’s financial health up to the point of failure. However, provided they have all necessary data and information to do so that assessment can also be carried out by the resolution authority. 4.2.7.Resolution tools and powers As resolution action would be set out in the resolution plan in advance, it should be carried out in a way which does not undermine the functioning of the rest of a wider group of which the CCP may form part. Any outstanding contractual obligations of financial support for the CCP, such as guarantees from a parent undertaking, should however be exercisable by the resolution authority, in line with how they would be called upon in normal insolvency proceedings. Resolution should be undertaken by way of several tools which could be used separately or in conjunction: (i) sale of a CCP’s entire or critical functions to a viable competitor, (ii) creation of a publicly controlled bridge CCP, and (iii) allocation of losses and positions among clearing members. The Regulation does not mandate which tools and powers to use in different scenarios but leaves the choice to the authority, depending on the circumstances but where practicable in line with the resolution plan agreed by the resolution college. The various loss and position allocation options would provide the resolution authority with means to re-match the CCP’s book, stem further losses and obtain additional resources to recapitalise the CCP. Depending on the options chosen by the CCP and approved by the EMIR college as part of recovery plans, there can be overlap in the loss and position allocation tools available to the CCP as part of its recovery plan and to the resolution authority during resolution. For instance, resolution could take the shape of further auctions of the defaulters’ positions among remaining clearing members, a partial or full tear-up of contracts, further haircuts of outgoing variation margin payments, the exercise of any outstanding cash calls set out in recovery plans or of a cash call reserved specifically for the resolution authority in the CCP's internal (operating) rules, and a write-down of capital and debt instruments issued by the CCP or other unsecured liabilities and a conversion of any debt instruments or other unsecured liabilities into shares. Finally, the Regulation does not exclude the possibility for resolution authorities to exercise other options in accordance with the principles of resolution, including full respect for the hierarchy of claims, such to avoid public bail-outs and moral hazard etc., notwithstanding the safeguard that no creditor should be left worse-off than in insolvency. As such they can call on further private resources, either within the CCP (e.g. using default funds of non-affected product lines) or from outside parties (e.g. calling on clearing members to voluntarily accept further allocations of positions). Should these options be unavailable or be demonstrably insufficient to safeguard financial stability, government participation in the shape of equity support or temporary public ownership could be considered as a last resort. Such steps by the government would nonetheless need to comply with applicable rules on State aid, including a restructuring of the operations of the CCP, and enable the deployed funds to be recouped from the CCP over time. Separately, temporary liquidity support from the central bank could, while not a resolution tool, facilitate the process of resolution. Such support would be subject to the scenarios set out in resolution plans under which CCPs in resolution could be envisaged to access central bank liquidity, and to the ultimate discretion of central banks themselves. 4.2.8.Ancillary provisions concerning resolution In order to ensure that resolution decisions are taken in accordance with key principles regarding property rights, compliance with relevant securities and company law and national constitutional arrangements, the Regulation includes the necessary provisions and steps which resolution authorities would have to comply with before and upon taking resolution decisions. For example, these include ensuring an accurate valuation of the balance sheet of the CCP, safeguards for affected stakeholders to receive compensation if they end up worse than if the CCP had not been resolved but they would have been subject to further possible actions under the CCP's internal rules for allocating losses or in insolvency and the procedural steps by way of which authorities should notify the CCP and other authorities concerned of resolution decisions. To facilitate resolution and the objective of safeguarding financial stability, the framework also includes a temporary moratorium on certain obligations of the CCP and stays on the ordinary rights of counterparties to terminate and close-out against the CCP arising solely by virtue of the exercise of resolution powers in relation to the CCP. Accompanying these steps are appropriate protections for payments due to other financial market infrastructures and for collateral and netting arrangements in line with those in the BRRD. 4.2.9.Third countries The distress or failure of a CCP can have international spill-over-effects, in particular where its clearing members are established in jurisdictions other than where the CCP is established. The FSB Key Attributes set out that authorities in different jurisdictions should cooperate in resolution cases, to recognise and enforce each other’s resolution actions in relation to relevant actors, assets or liabilities located in their territory. In order to improve the enforceability of an EU authority’s action on clearing members located in third countries, CCPs would be required to ensure that the actions in their recovery plans are binding across jurisdictions. This means ensuring that recovery options constitute contractual obligations under the law of the country in which the CCP is established, or otherwise demonstrating to the satisfaction of competent and resolution authorities that the plans’ provisions are enforceable, for instance under the law of a third country. This would help resolution authorities enforce any outstanding obligations in these plans in resolution. Beyond this, authorities should engage in cooperation with a third country authority in order to recognise and enforce its decision in relation to any relevant assets or contracts governed by the law of that country. Resolution authorities should enter into cooperation arrangements with authorities in third countries setting out the details of cooperation. For any given CCP, there may be several Member States or third countries where clearing members could be located or under whose laws relevant assets or contracts could be governed. ESMA should therefore issue guidance on the relevant content of those arrangements with concerned third countries, in order to establish common application of the conditions in these cases. In order to facilitate the enforcement of actions by a third-country resolution authority on relevant clearing members, contracts or other assets or liabilities located in the EU, relevant national authorities should be in charge of recognising and giving effect to them, or refusing to do so in specific circumstances. Recognition should occur provided the measures do not have an adverse effect on the financial stability of the Member State, creditors of the CCP receive the same treatment as other creditors regardless of location, and there would be no material fiscal implications for the Member State. 4.2.10.Changes to the Company Law Directives, BRRD, EMIR and the ESMA Regulation and creation of an ESMA Resolution Committee The Union Company Law Directives contain rules for the protection of shareholders and creditors. Some of these rules may hinder rapid action by resolution authorities. These rules have already been amended as regards banks by Directive 2014/59/EU and, pursuant to the Commission proposal amending Directive 2014/59/EU (COM(2016) 852), the application of those amendments is proposed to be extended in national law to CCPs.

Pursuant to the Commission proposal amending Directive 2014/59/EU (COM(2016) 852), CCPs with banking licences subject to the BRRD will be, by the time this Regulation is applicable, carved out of scope of that Directive and brought exclusively under the arrangements and requirements of this Regulation. Furthermore, in order to ensure that authorities can impose penalties when the provisions of the proposed Regulation have not been complied with, the Commission proposal amending Directive 2014/59/EU (COM(2016) 852) stipulates extending the scope of application of its Title VIII also to CCPs. This extension ensures that sanctioning powers regarding recovery and resolution of financial institutions are consistent. EMIR is amended to introduce the possibility for a clearing obligation to be temporarily suspended in the context of resolution of a CCP where 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. The role of CCPs' risk committee is also enhanced to encourage the CCP to manage its risks prudently. In order to ensure that the authorities responsible for resolution may provide input to the work of ESMA under this Regulation, they should be able to accompany the competent authority to meetings of the ESMA Board of Supervisors who shall be non-voting. To prepare its decisions under this Regulation and ensure full input of EBA members in this process, ESMA is required to set up a committee for this purpose where certain competent authorities under Regulation 1093/2010 shall be invited to participate as observers. 2016/0365 (COD) Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on a framework for the recovery and resolution of central counterparties and amending Regulations (EU) No 1095/2010, (EU) No 648/2012, and (EU) 2015/2365 (Text with EEA relevance) 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, Having regard to the opinion of the European Central Bank, Acting in accordance with the ordinary legislative procedure, Whereas: (1)Financial markets are pivotal for the functioning of modern economies. The more integrated they are, the more efficient the allocation of economic resources will be, 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 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 de-stabilise the entire financial market and damage growth across the wider economy. (2)Central counterparties (CCPs) are key components of 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 counterparties' transactions and positions, and honour the obligations created by the transactions and receive adequate collateral from their members as margin and as contributions to default funds. (3)The integration of Union financial markets has meant that CCPs have evolved 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, from listed and over-the-counter (OTC) financial and commodity derivatives to cash equities, bonds and other products such as repos. They provide their services across national borders to a broad range of financial and other institutions across the Union. While some CCPs authorised in the Union remain focussed on domestic markets, they are all systemically important in at least 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 is essential. In force since August 2012, Regulation (EU) No 648/2012 of the European Parliament and of the Council requires CCPs to observe high prudential, organisational and conduct of business standards. Competent authorities are tasked with the full oversight of their activities, working together within colleges which group together relevant authorities for the specific tasks allocated to them. In accordance with commitments entered into by G20 leaders since the 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 may, in turn, provide additional challenges for the CCPs' risk management strategies. (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 the CCP, including one or more defaults by clearing members. Faced with a scenario of severe distress or impending failure, financial institutions should in principle remain subject to normal insolvency proceedings. However, as the 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 continuation of the critical functions of financial institutions for the sake of preserving financial stability. In order to prevent these negative consequences of normal insolvency proceedings, it is necessary to create a special resolution framework for CCPs. (6)The crisis also highlighted the lack of adequate tools to preserve the critical functions provided by failing financial institutions. It further demonstrated the lack of frameworks to enable cooperation and coordination amongst authorities, in particular those located in different Member States or jurisdictions, to ensure the implementation of swift and decisive action. Without such tools and lack of cooperation and coordination frameworks, Member States were compelled to save financial institutions using taxpayers' money in order to stem contagion and reduce panic. While CCPs were not direct recipients of extraordinary public financial support in the crisis, they were indirect beneficiaries of the rescue measures undertaken in relation to banks and were protected from the effects which banks failing on their obligations would otherwise have had on them. A recovery and resolution framework for CCPs is therefore necessary to prevent reliance on taxpayers' money in the event of their disorderly failure. (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 down the remaining activities through normal insolvency proceedings, and to preserve financial stability while minimising the cost of a CCP failure on taxpayers. The recovery and resolution framework further bolsters CCPs' and authorities' preparedness to mitigate financial stress 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 recovery and resolution of CCPs is likely to constitute a barrier to the smooth operation 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 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 may affect CCPs and their members differently across Member States, potentially creating competitive distortions across the internal market. The absence of common rules and tools for how distress or failure in a CCP would be handled can affect participants' choice to clear and CCPs' choice of their place of establishment, thereby preventing CCPs from fully benefiting from their fundamental freedoms within the single market. In turn, this could discourage participants from accessing CCPs across borders in the internal market and hinder further integration in Europe’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 other financial institutions which has taken place in the wake of the 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 all Member States pursuant to Directive 2014/59/EU of the European Parliament and of the Council. (10)Building on the approach for bank recovery and resolution, Member States' authorities should be prepared and have adequate recovery and resolution 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 both by the failure of the CCP's clearing members or as a result of non-default events. (11)The use of a Regulation is necessary 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 laws in respect of an area otherwise governed by directly applicable Union law and increasingly characterised by the cross-border provision of CCPs' services. It is therefore appropriate to also adopt uniform and directly applicable rules on recovery and resolution of CCPs. (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 should apply to all CCPs subject to the prudential requirements laid down in Regulation (EU) No 648/2012, regardless of whether they have a bank licence. The insolvency of a CCP affiliated to a group could rapidly impact the solvency of the whole group and cause further financial instability. While the groups of which a CCP may form part do not need to be subject to the full regime, certain provisions should also apply to parent undertakings, where application of those provisions at that level would be conducive to more effective recovery and resolution. Authorities should therefore possess targeted means of action with respect to parent undertakings in order to ensure effective recovery and resolution of the CCP and reduce the possibility of contagion to other group entities. (13)In order to ensure that resolution actions are taken efficiently and effectively, and in line with resolution objectives, Member States should appoint public administrative authorities or authorities entrusted with public administrative powers to perform functions and tasks in relation to resolution. Member States should also ensure that appropriate resources are allocated to those resolution authorities. Where a Member State designates the authority responsible for the prudential supervision of CCPs as a resolution authority, adequate structural arrangements should be put in place to separate the supervisory and resolution functions to avoid any conflicts of interest and risk of regulatory forbearance. (14)In light of the consequences that the failure of a CCP and the subsequent actions may 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 the Member States should be closely involved, at an early stage, in the process of recovery and resolution. (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 the assessment of recovery plans developed by the CCP, the preparation and maintenance of resolution plans and addressing any impediments to resolvability. (16)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 all 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 these objectives. Similarly, in order to ensure a regular exchange of views and coordination with relevant third countries authorities, these should be invited to participate in resolution colleges as observers where necessary. Authorities should always take into account the impact of their decisions on the financial stability in the Member States where the CCP’s operations are critical or important for local financial markets, including where clearing members are located and where linked trading venues and financial market infrastructures are established. (17)In order to prepare the decisions of ESMA in relation to the tasks allocated to it and to ensure the comprehensive involvement of EBA and its members in the preparation of these decisions, ESMA should create an internal Resolution Committee and should invite relevant EBA competent authorities to participate as observers. (18)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, shareholding structure, legal form, risk profile, size, legal status 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. (19)In order to deal in an efficient manner with failing CCPs, 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 plans for recovery should they face financial distress. Such plans should be based on realistic assumptions applicable in a range of robust and severe scenarios, including deteriorations arising from a default event or from a non-default event. 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 plan in all scenarios. Recovery plans should not assume access to extraordinary public financial support or expose taxpayers to the risk of loss. (20)CCPs should prepare and regularly update their recovery plans. The requirement to prepare a recovery plan should be applied proportionately, reflecting the systemic importance of the CCP and its interconnectedness with the financial system. The recovery phase in this context should start when there is a significant deterioration of the CCP's financial situation or risk of breach of its prudential requirements under Regulation (EU) 648/2012. This should be indicated with relation to a framework of qualitative or quantitative indicators included in the recovery plan. (21)The CCP should submit its recovery plan to competent authorities and the supervisory college, established under Regulation (EU) No 648/2012, for a complete assessment, to be reached 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 stress. (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. (23)CCPs should ensure that the plans are non-discriminatory and balanced in terms of their impacts and the incentives they create. They should not disadvantage clearing members or clients in a disproportionate way. In particular, in accordance with Regulation (EU) No 648/2012 CCPs should ensure that their clearing members have limited exposures toward the CCP. CCPs should ensure that all relevant stakeholders are consulted on the recovery plan through their involvement in the CCP's risk committee, and by being involved in the development of the recovery plan.

(24)To ensure the ability of a CCP 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, the CCP’s operating rules should include contractual provisions for that purpose. (25)Where a CCP does not present an adequate recovery plan, competent authorities should be able to require the CCP to take measures necessary to redress the material deficiencies of the plan in order to strengthen the business of the CCP and ensure that the CCP can restore its capital or match its book in case 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. (26)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 by the relevant authorities of the resolution college. Authorities should have all the information necessary to identify and ensure the continuance of critical functions. The content of a resolution plan should, however, be proportionate to the systemic importance of the CCP and based, inter alia, on the information provided by it. (27)Resolution authorities, on the basis of the assessment of resolvability, should have the power to require changes to the 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 use of resolution tools and ensure the resolvability of the entities concerned. (28)Resolution plans and resolvability assessments constitute areas where day-to-day supervisory considerations are taken over 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, ESMA should play a mediation role in accordance with Article 19 of Regulation (EU) No 1095/2010. 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 EBA Regulation 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. (29)Where expedient to achieve the objective of orderly recovery and resolution, competent and resolution authorities should identify specific measures in relation to a parent undertaking. Depending on the structure of the group to which the CCP belongs, it can be necessary that the recovery plan of the CCP sets out the conditions under which the provision of possible financial support, 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 on such arrangements would mitigate risks to the liquidity and solvency of the group entity providing support to a CCP facing financial distress. Any change to such arrangements should be considered to be a material change for the purpose of reviewing the recovery plan. (30)Given the sensitivity of the information contained in the recovery and resolution plans, those plans should be subject to appropriate confidentiality provisions. (31)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. (32)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 course where its actions could be detrimental for overall financial stability. Therefore, competent authorities should be granted early intervention powers to avoid or minimise adverse effects on financial stability that could result from the CCP’s implementation of certain measures. The 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. (33)During the recovery and early intervention phases, shareholders should retain their rights in full. They should no longer fully retain such rights once the CCP has been put under resolution. (34)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 to restore its viability, 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 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. (35)The provision for 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 the resolution framework provided that a number of conditions are met. (36)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. Their exercise should be subject to common conditions, objectives, and general principles. The use of additional tools and powers by resolution authorities should be consistent with the resolution principles and objectives. In particular, the use of such tools or powers should not impinge on the effective resolution of cross-border groups. (37)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 by minimising reliance on extraordinary public financial support to failing CCPs. (38)The critical functions of a failing CCP should be maintained, albeit re-structured with changes to the management where appropriate, through the use of resolution tools as a going concern with the use, to the extent possible, of private funds. That could be achieved either through sale to or merger with a solvent third party, or after having restructured or written down the contracts and liabilities of the CCP via the allocation of losses and positions, or after having written down shares or written down and converted its debt to equity, in order to effect a recapitalisation. In line with this objective, prior to these actions, the resolution authority should consider enforcing any existing and outstanding contractual obligations of the CCP in line with how they would be called in under normal insolvency proceedings. (39)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 under circumstances requiring an immediate reaction by the relevant resolution authority. That authority should therefore be allowed to take resolution action notwithstanding the exercise of recovery measures by the CCP or without imposing an obligation to first use the early intervention powers. (40)When taking resolution actions, the resolution authority of the CCP should take into account and follow the measures provided for in the resolution plans developed within the resolution college, unless the resolution authority considers, taking into account circumstances of the case, that resolution objectives will be achieved more effectively by taking actions which are not provided for in the resolution plans. The resolution authority should promptly inform the resolution college of the resolution actions they plan to undertake, in particular where such action deviates from the plan. (41)Interference with property rights should be proportionate to the financial stability risk. Resolution tools should therefore be applied only 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. Given that resolution tools and powers may disrupt the rights of shareholders, clearing participants and creditors, resolution action should be taken only where necessary in the public interest and any interference with those rights should be compatible with the Charter. In particular, where creditors within the same class are treated differently in the context of resolution action, such distinctions should be justified in the public interest and proportionate to the risks being addressed and should be neither directly nor indirectly discriminatory on the grounds of nationality. (42)Affected shareholders, clearing participants and creditors should not incur losses greater than those which they would have incurred if the resolution authority would not have taken resolution action in relation to the CCP and they would instead have been subject to possible outstanding obligations pursuant to the CCP's recovery plan or other arrangements in its operating rules or the CCP had been wound up in normal insolvency proceedings. 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. (43)For the purpose of protecting the right of shareholders, counterparties and creditors, clear obligations should be laid down concerning the valuation of the assets and liabilities of the CCP and the valuation of the treatment that shareholders and creditors would have received if the resolution authority would not have taken resolution action. It should be possible to commence a valuation already during the recovery phase. Before any resolution action is taken, a fair and realistic valuation of the assets and liabilities of the CCP should be carried out. Such a valuation should be subject to a right of appeal only together with the resolution decision. In addition, in certain cases, an ex-post comparison between the treatment that shareholders and creditors have actually been afforded and the treatment they would have received if the resolution authority would not have taken resolution action in relation to the CCP and they would instead have been subject to possible outstanding obligations pursuant to the CCP's recovery plan or other arrangements in its operating rules or under normal insolvency proceedings, should be carried out after resolution tools have been used. Where shareholders and creditors have received, in payment of, or compensation for, their claims, less than the amount that they would have received if the resolution authority would not have taken resolution action in relation to the CCP and they would instead have been subject to possible outstanding obligations pursuant to the CCP's recovery plan or other arrangements in its operating rules or under normal insolvency proceedings, they should in certain cases be entitled to the payment of the difference. As opposed to the valuation prior to the resolution action, 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 and creditors.

(44)To ensure an effective resolution, 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 failing CCP should be based on fair, prudent and realistic assumptions at the moment when the resolution tools are used. 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, that resolution authorities 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. (45)Upon entry into resolution, any outstanding contractual obligations set out in the operating rules of the CCP, including outstanding recovery measures, should be honoured except where the exercise of another resolution power or tool is more appropriate to avoid adverse effects for financial stability or to secure the critical functions of the CCP in a timely manner. Losses should then 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 subordinated unsecured debt and senior unsecured liabilities, to the extent necessary, without jeopardising broader financial stability, in accordance with their ranking under applicable national insolvency law. (46)In case the exercise by the CCP of its recovery measures has not succeeded in stemming losses, restoring it to a balanced position in terms of having a matched book of outstanding positions or replenishing pre-funded resources comprehensively, or where the resolution authority has determined that the exercise of these actions by the CCP would be detrimental for financial stability, the exercise of loss and position allocation powers by the authority should be aimed at allocating the outstanding losses, ensuring the return of the CCP to a balanced position and replenishing the required pre-funded resources either through the continued exercise of the tools in the CCP’s operating rules or through other actions. (47)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. Where creditors within the same class are treated differently in the context of resolution action, those distinctions should be justified in the public interest and should be neither directly nor indirectly discriminatory on the basis of nationality or any other ground. (48)The resolution tools should be used to the fullest extent possible before any public sector injection of capital or equivalent extraordinary public financial support to a CCP. The use of public financial support to assist in the resolution of failing institutions should comply with the relevant State aid provisions. (49)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 loss and position allocation tools 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 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. (50)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 are able to apply the loss and position allocation tools both where the objective is to maintain the operations of the failing CCP and where critical services are transferred to a bridge CCP or a third party and the residual part of the CCP ceases to operate and is wound up. (51)Where the loss and position 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. (52)The loss and position 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 prefunded 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, forcibly allocate them to the extent that voluntary arrangements established as part of recovery plan are not exhausted upon entry into resolution, partially or fully tear-up the contracts of defaulted clearing members, product lines and of the CCP, further haircut outgoing variation margin payments, exercise any outstanding cash calls set out in recovery plans, exercise additional cash calls specifically earmarked for the resolution authority 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. (53)Resolution authorities should be able to exclude or partially exclude some contracts from loss and position allocation in a number of circumstances. Where those exclusions are applied, the level of loss or exposure applied to other contracts may be increased to take account of such exclusions subject to the "no creditor worse off principle" being respected. (54)Where the resolution tools have been used 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. (55)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. (56)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. Proceeds should be calculated net of the costs arisen from the failure of the CCP and from the resolution process. (57)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 (58)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 the disclosure to the public of such information required by Regulation (EU) No 596/2014 of the European Parliament and of the Council may 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. (59)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 not longer viable. (60)Should all other options be practically unavailable or be 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, and enable the deployed funds to be recouped from the CCP over time. The use of government stabilisation tools is notwithstanding the role of central banks in providing liquidity to the financial system even in times of stress. (61)To ensure the ability of a Union 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. (62)Resolution authorities should have all the necessary legal powers that, in different combinations, could be exercised when using 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 cash calls and position allocations, the power to tear up 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 Member State law, under civil or criminal law for their responsibility for the failure of the CCP. (63)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 and details of recovery and resolution plans and the result of any assessment of those plans may have farreaching 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 use 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. However, 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.

(64)Resolution authorities should have ancillary powers to ensure the effectiveness of the transfer of instruments of ownership or debt instruments and assets, rights and liabilities. Subject to the safeguards, those powers should include the power to remove third parties rights 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