COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document 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
Date: 2016-11-28
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: company in difficulties, financial institution, financial instrument, financial intervention, financial legislation, financial services, financial solvency, financial transaction

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 28.11.2016  SWD(2016) 368 final   COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document 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     {COM(2016) 856 final} {SWD(2016) 369 final}  
 
 
TABLE OF CONTENTS 

1 

INTRODUCTION ....................................................................................................... 4 

1.1.

  Recovery and resolution of financial institutions .............................................. 4 

2 

PROCEDURAL  ISSUES  AND  CONSULTATION  OF  INTERESTED 
PARTIES ..................................................................................................................... 6 

2.1  Procedural issues ............................................................................................... 6 
2.2  External expertise and consultation of interested parties .................................. 7 
Stakeholder consultation ..................................................................... 7 
External expertise ................................................................................ 7 

2.2.1 
2.2.2 

3 

POLICY CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY ................ 8 

3.1  Background and context .................................................................................... 8 
3.2  Overview of legislative framework ................................................................... 9 
3.3  Problem definition ........................................................................................... 12 

4 

THE EU'S RIGHT TO ACT AND JUSTIFICATION .............................................. 19 

5  OBJECTIVES ........................................................................................................... 21 

6 

PRINCIPAL  POLICY  OPTIONS,  COMPARISON  AND  ANALYSIS  OF 
THE IMPACTS ......................................................................................................... 25 

6.1  Baseline scenario ............................................................................................. 25 
6.2  Possible options to increase preparedness of supervisors and CCPs for 

crisis situations ................................................................................................ 25 

6.3  Possible  options  to  improve  early  intervention  arrangements  for 

authorities ........................................................................................................ 30 

6.4  Possible  options  to  ensure  resolution  of  CCPs  in  a  timely  and  robust 

manner (scope of tools and trigger for using them) ........................................ 34 

6.5  Possible options to carry out resolution (first set of concrete resolution 

tools) ................................................................................................................ 39 

6.6  Possible loss and position allocation tools (second set of concrete tools 

in addition to section 6.5) for resolving a CCP ............................................... 46 

7  OVERALL IMPACTS OF THE PACKAGE ........................................................... 59 

7.1  Small and medium sized institutions (SMEs) ................................................. 59 
7.2  Administrative costs ........................................................................................ 60 
7.3  EU budget ........................................................................................................ 60 
7.4  Fundamental rights .......................................................................................... 60 
7.5  Social impacts .................................................................................................. 62 
7.6  Third country impacts ...................................................................................... 63 
7.7  Environmental impacts .................................................................................... 64 
7.8  Summary of impact on key stakeholder groups of preferred options ............. 65 

8.  MONITORING AND EVALUATION ..................................................................... 70 

2 

 
 
 
ANNEX I – GLOSSARY .................................................................................................. 71 

ANNEX II – ROLE AND FUNCTION OF CENTRAL COUNTERPARTIES .............. 76 

ANNEX  III  –  INTERNATIONAL  WORK  ON  CCPS  (AND  OTHER 
(CPSS/CPMI-IOSCO 

FINANCIAL  MARKET 
AND FSB) ................................................................................................................. 77 

INFRASTRUCTURES) 

ANNEX 

IV  –  RELEVANT  US  REGIME  REGARDING  CRISIS 
MANAGEMENT OF NONBANK FINANCIAL INSTITUTIONS ........................ 86 

ANNEX V – THE BENEFITS AND CONSEQUENCES OF CCP CLEARING ............ 88 

ANNEX VI – DATA ON EUROPEAN CCPS AND RECENT TRENDS IN THE 

INCREASE IN OTC CLEARING ............................................................................ 90 

ANNEX VII – COMPETITION AND CCP INTEROPERABILITY .............................. 96 

ANNEX VIII – HOW A CCP COULD FAIL................................................................... 97 

ANNEX  IX  –  CCP  FINANCIAL  RESOURCES  “WATERFALL”  AND 

INCENTIVES ........................................................................................................... 99 

ANNEX X – FAILURES AND NEAR-FAILURES OF CCPS ..................................... 101 

ANNEX  XI  –  NUMERICAL  EXAMPLES  OF  LOSS-ALLOCATION  TOOLS 

AND STAKEHOLDER POSITIONS ..................................................................... 103 

ANNEX  XII  –  OTHER  OPTIONS  NOT  CONSIDERED  IN  THIS  IMPACT 

ASSESSMENT ....................................................................................................... 108 

3 

 
 
 
 
 
1 

INTRODUCTION 

This  impact  assessment  considers  the  costs  and  benefits  of  an  EU-wide  recovery  and 
resolution regime for central counterparties (CCPs).1  A clearing house, acting as a CCP, 
intervenes between counterparties to financial transactions (through novation2) to assume 
and carry out their rights and obligations, acting as the buyer to every seller and the seller 
to  every  buyer  for  a  specified  set  of  contracts.3  They  clear  financial  transactions  of 
various  types  (such  as  in  equities,  derivatives  and  repos)  for  their  clearing  members 
(typically large banks) and the clients of their clearing members (e.g. pension funds and 
asset  managers).  This  concentration  of  positions  allows  them  to  be  netted  down  to 
considerably reduce total exposures of the CCP, as well as of its members and clients4.  

CCPs  contribute  to  market  stability  by  imposing  credit  and  other  risk  management 
requirements on their members and clients and by mitigating most of the risks inherent in 
post-trading  activities.5  In  exchange  for  taking  on  and  netting  their  positions,  the  CCP 
collects  collateral  (‘margin’)  from  clearing  members  to  cover  its  liabilities  in  case  any 
participant 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 another G20 commitment, namely the obligation 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 
trade  repositories  (EMIR).6  That  Regulation  also  sets  out 
counterparties  and 
comprehensive prudential requirements for CCPs, as well as requirements regarding the 
operations and oversight of CCPs.  

1.1  Recovery and resolution of financial institutions 

Financial  markets  are  pivotal  for  the  functioning  of  modern  economies.  The  more 
integrated they are, the more efficient the allocation of economic resources and long run 
economic performance will be. However, at the same time, to improve the functioning of 
the  Single  Market  in  financial  services,  it  is  important  to  have  procedures  in  place  to 
ensure that if an important financial institution that is active in this market faces financial 

1   Banks  and  investment  firms  are  subject  to  Directive  2014/59/EU  establishing  a  framework  for  the 
recovery  and  resolution  of  credit  institutions  and  investment  firms  http://eur-lex.europa.eu/legal-
content/EN/TXT/;ELX_SESSIONID=2hCkTyTNGyHG1hNnQmvLry3rTZt5TTSkrM1LLv12RFZ9hN
y9lbl7!-1897320616?uri=uriserv:OJ.L_.2014.173.01.0190.01.ENG   

2   In  economic  terms,  novation  is  the  replacement  of  one  contract  with  another  or,  in  this  case,  one 

contract with two new contracts. 

3   See annex II for more details on the role and function of CCPs in financial markets. 
4   Clearing  members  are  direct  participants  in  CCPs,  often  banks,  with  contractual  responsibilities  for 
discharging  the  financial  obligations  arising  from  that  participation,  while  clients  are  entities  which 
clear transactions on the CCP on the basis of contractual relationships with clearing members. 

5   See annex V for details on the benefits of CCP clearing  
6   Regulation (EU) No 648/2012 

4 

 
 
 
                                                            
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.  

Any  failing  institution  should  in  principle  be  liquidated  under  normal  insolvency 
proceedings.  Where  such  an  approach  might  jeopardise  financial  stability,  interrupt  the 
provision  of  critical  functions  to  the  economy,  or  affect  other  market  participants 
disproportionately, and there is  a public interest  in  doing  so, resolution tools should be 
applied by public authorities to ensure the institution can fail in an orderly manner. Such 
action  would  avoid  the  need  for  the  State  to  bail  out  the  institution  concerned  with 
taxpayer money, to stem the threat of financial instability.  

In  this  context,  CCPs  may  enter  into  severe  financial  distress,  exceeding  its  EMIR 
resources,  due  to  (i) "member  default",  when  a clearing  member(s)  is  unable to  pay  its 
obligations as they fall due or (ii) "other (non-default) causes", in relation to, for instance, 
operational, business, or legal reasons (such as cyber-attacks, fraud or investment losses). 
Recovery actions would be undertaken by the CCP with the aim of addressing the cause 
of  the  financial  distress  and  restoring  its  long-term  viability.  If  these  actions  are 
insufficient,  authorities  could  place  the  CCP  into  resolution  with  the  aim  of  preserving 
financial  stability  and  the  broader  economy,  minimising  costs  of  the  CCP  failure  on 
taxpayers and restoring the viability of critical functions of the CCP. They would do this 
by  allocating  losses  on  private  sector  participants  (e.g.  shareholders,  clearing  members 
and  their  clients),  to  the  extent  possible  and  in  line  with  the  European  Convention  of 
Human Rights, and would wind up the CCP's non-critical functions in an orderly manner. 
As such, the measures would be designed 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 would especially relevant where a financial institution 
is of such a size, market importance and interconnectedness that its distress or disorderly 
failure would jeopardise the normal functioning of the financial system, which would in 
turn adversely impact the real economy, as is the case of CCPs.  

Due  to  their  different  functions  and  business  models,  the  risks  inherent  in  banks  and 
CCPs vary. Consequently the failure of a CCP may arise, and will resonate, in different 
ways  in  comparison  to  a  bank.  Based  on  the  responses  to  the  2012  Commission 
consultation on a possible recovery and resolution framework for non-banks7 and on the 
views of wider commentators, it has been acknowledged that it would be insufficient to 
create a CCP recovery and resolution regime by merely transposing the tools and powers, 
in  particular  those  in  relation  to  resolution,  of  the  EU  Bank  Recovery  and  Resolution 
Directive (BRRD)8. Instead the preference would be to tailor specific tools and powers 
more to the underlying business models of CCPs. 

More broadly, from an international perspective, 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 

7   http://ec.europa.eu/internal_market/consultations/2012/nonbanks/consultation-document_en.pdf   
8   Directive  2014/59/EU,  the  Bank  Recovery and  Resolution  Directive  (BRRD).  As  part  of  the  steps  to 
integrate responsibilities for bank supervision and resolution in the Banking Union, the latter has been 
complemented  by  a  Single  Resolution  Mechanism  (Regulation  (EU)  No  806/2014).  See 
http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm 
http://ec.europa.eu/internal_market/finances/banking-union/index_en.htm  

5 

 
 
 
                                                            
and appropriate recovery and resolution tools.9 Furthermore, the Committee on Payment 
and  Settlement  Systems/Market  Infrastructures  (CPSS/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.10  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.11 A proposal 
to  create  a  European  framework  for  the  recovery  and  resolution  for  CCPs  had  been 
signalled  in  the  Commission’s  Work  Programme  for  2015,  but  was  carried  forward  in 
order to take into account further input from the continuing international work on CCP 
resilience, recovery and resolution, carried out by CPMI/IOSCO, the FSB and the Basel 
Committee on Banking Supervision (BCBS). 

2  PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

2.1  Procedural issues 

The first meeting of the impact assessment steering group took place on 10 April 2013. 
The  second  meeting  took  place  on  5  September  2014  and  the  third  one  on  11  March 
2015.  DGs  involved  in  the  steering  group  were  ECFIN,  TRADE,  SG,  LS,  JUST  and 
COMP.  The  minutes  of  the  final  steering  group  meeting  were  submitted  to  the  Impact 
Assessment  Board  on  8  April  2015.  The  Board  meeting  took  place  on  6  May  2015. 
While  a  positive  opinion  was  given,  the  Board  recommended  improving  the  following 
areas:  

(1)  the  rationale  for  acting  at  EU  level,  by  better  explaining  why  and  how  CCPs 
might  fail  and  by  describing  what  the  related risks  are including  their  cross-border 
dimension; 

(2) the option section, by better justifying the small range of alternatives considered 
and clarifying whether the options are different to those retained for banks;  

(3)  the  assessment  of  impacts,  by  better  explaining  how  significant  administrative 
costs are expected to be, who will be affected and how by the different options, and 
which categories of stakeholders support which options. 

These have been addressed and incorporated in this final version.  

9   Key  Attributes  of  Effective  Resolution  Regimes  for  Financial  Institutions,  Financial  Stability  Board 
(November  2011)  http://www.financialstabilityboard.org/publications/r_111104cc.pdf  Updated 
in 
October 
http://www.financialstabilityboard.org/wp-
annexes 
content/uploads/r_141015.pdf  

sector-specific 

2014  with 

10   http://www.bis.org/cpmi/publ/d121.pdf;  

http://www.financialstabilityboard.org/wp-content/uploads/r_141015.pdf  

11   http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-2013-

0533+0+DOC+XML+V0//EN  

6 

 
 
 
                                                            
 
2.2  External expertise and consultation of interested parties 

2.2.1  Stakeholder consultation 

A  public  consultation  on  a  possible  recovery  and  resolution  framework  for  non-bank 
institutions12 was carried out between 5 October and 28 December 2012. 67 replies were 
received13. On the whole, the consultation indicated that the priority should be to develop 
an EU-wide recovery and resolution framework for CCPs.   

Respondents generally agreed that, like the BRRD for banks, an EU framework for the 
recovery  and  resolution  of  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. They recalled that this necessitated tailoring the 
BRRD tools to the specificities of CCPs’ business models.   

2.2.2  External expertise 

The Commission has gained valuable insights through its participation in the discussions 
and  exchange  of  views  informing  the  CPMI/IOSCO  report  providing  guidance  on  the 
recovery  of  financial  market  infrastructures.  The  Commission  has  also  attentively 
followed  the  work  relating  to  the  resolution  of  other  non-bank  financial  institutions 
carried out by the FSB. On their part, in elaborating the reports proposing guidance on 
(respectively) recovery and resolution, both CPMI/IOSCO and the FSB asked interested 
parties  to  provide  comments  on  their  draft  guidance  documents  and  published  the 
responses received.14 On the whole, these international level consultations for Financial 
Market  Infrastructures  confirm  the  views  expressed  in  the  Commission’s  own 
consultation, and provide some additional feedback on the relative merits of some of the 
proposed policy options and resolution tools. 

On  22  November  2013  the  Commission  services  held  a  first  meeting  with  Member 
States' experts to discuss the international work being carried out by the FSB and CPMI-
IOSCO.  Member  States  agreed  on  the  need  for  a  CCP  recovery  and  resolution  legal 
framework  in  the  EU.  Further  meetings  of  Member  States'  experts  took  place  on  19 
December 2014, 30 September 2015 and 27 June 2016. 

of 

summary 

A 
http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetail&grou
pID=2392&NewSearch=1&NewSearch=1 The Commission services took account of the 
opinions voiced by stakeholders in preparing the legislative proposal.  

meetings 

found 

can 

the 

be 

at 

12   http://ec.europa.eu/internal_market/consultations/2012/nonbanks/consultation-document_en.pdf   
13   A summary is available at: http://ec.europa.eu/internal_market/consultations/2012/nonbanks/summary-

of-replies.pdf   

14  Public 

responses 

can  be 

found 

at:  http://www.bis.org/publ/cpss109/comments.htm 

and: 

https://www.financialstabilityboard.org/publications/c_131121.htm  

7 

 
 
 
                                                            
3  POLICY CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY 

3.1  Background and context  

CCPs constitute the "central nervous system"15 of financial markets by playing a key role 
in  managing  systemic  risk.  In  consequence,  a  significant  amount  of  financial  risk  is 
concentrated  in  a  CCP.  The  annual  value  of  transactions  cleared  by  CCPs  is  in  the 
trillions of euros. For instance, the volume of centrally cleared OTC transactions at the 
end of 2012 was estimated to total USD 346.4 trillion, of which USD 341.4 trillion was 
attributable  to  interest  rate  derivatives  and  USD  5  trillion  to  credit  default  swaps 
(CDSs).16  More  disaggregated  data  from  end  June  2015  shows  that  for  interest  rate 
derivatives alone, the gross outstanding  notional amount  was estimated to  be  USD 175 
trillion  (around  48%  of  notional  outstandings17)  and  for  OTC  credit  derivatives,  the 
gross  outstanding  notional  amount  of  USD  2.4  trillion  (12%  of  the  total  amount 
outstanding)  had  been  centrally  cleared.18  In  the  US,  the  trend  for  centrally  cleared 
trades  has  been  stabilising  at  80%  of  weekly  aggregate  transaction  volumes  for  credit 
derivatives  and  70%  for  single-currency  interest  rate  derivatives,  respectively  since  Q4 
2013.19 

Effective regulation and robust supervision of CCPs is thus essential, which is assured in 
the  EU  by  EMIR.  However,  no  system  of  rules  and  practices  can  preclude  failure 
absolutely.20 While actual failures have been rare and have not occurred recently, those 
that have taken place have been brought on by vulnerabilities inherent in CCPs’ business 
models. These include the collection of insufficient initial margin by the CCP against the 
risks it is exposed to, an inability by clearing members to meet sudden large margin calls 
and problems relating to the ability of CCPs and authorities in grasping the build-up of 
the risks concentrated in CCPs and the implications of this for the wider market.21    

Most  European  market  infrastructures  for  the  clearing  and  settlement  of  financial 
transactions  were  originally  created  to  serve  domestic  needs.  Today,  many  CCPs  clear 
several product classes, from listed and OTC financial and commodity derivatives to cash 
equities,  bonds  and  repos, and provide their  services across national borders. However, 
despite  the  expansion  and  diversification  of  the  services  offered  by  CCPs,  the  EU 
landscape  for  post-trade  (clearing  and  settlement)  services  continues  to  be  fragmented 
along  national  lines,  resulting  in  inefficiencies  and  higher  costs  for  cross-border 
transactions.22 

15   See  "Derivatives  Clearing  and  Settlement:  A  Comparison  of  Central  Counterparties  and  Alternative 
structures", Bliss, Robert and Robert Steigerwald, Economic Perspectives, 2006, 30 (4, Fourth Quarter, 
Federal Reserve Bank of Chicago), p.22-29. Available at 
http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2006/ep_4qtr2006_part2
_bliss_steigerwald.pdf 

16   See annex VI 
17   Cf. 9th FSB progress report on OTC derivatives reform (2015), page 14. 
18   Ibid. page 15. 
19   Ibid,. page 15.  
20   See annex VIII for details on how CCP failure may arise 
21   See annex X for examples of CCP (near)-failures 
22   See annex VII for details of recent developments  
8 

 
 
 
                                                            
Twenty-one CCPs currently serve the securities and derivatives markets in the European 
Economic Area (EEA).23 Some serve primarily domestic markets and a single exchange, 
while  others  are  present  in  multiple  markets  and  serve  trading  venues  in  several  EU 
countries. Many  of the largest global banks are members of  multiple CCPs, illustrating 
the  potential  for  contagion.  For  example,  24  globally  systemically  important  banks  (G-
SIBs) are members of Eurex; or the other way of looking at it is that a designate G-SIB 
such  as  BNP  Paribas  is  a  member  of  at  least  five  EU  CCPs.  Annex  VI  provides  an 
overview of the main CCPs operating in Europe and their ownership models, the values 
of cash securities they cleared in 2011,24 the classes of OTC derivatives they offered to 
clear in April 2014, recent trends in the increase and subsequent stabilisation of central 
clearing of OTC derivatives, and the memberships of the largest global banks of leading 
global  CCPs.  The  ownership  of  CCPs  has  been  evolving  over  the  past  decade,  shifting 
from  the  traditional  user-owned  structure  to  a  wider  range  of  ownerships  and  models, 
including  hybrid  models  where  private  shareholders,  clearing  members  and  exchanges 
share  ownership.  Some  CCPs  are  still  owned  and  governed  by  their  members,  while 
others are fully or part-owned by non-members, either as listed companies or as part of a 
group, which may itself be listed.25  

Studies and publicly available figures suggest that CCPs that operate on a for-profit basis 
are  very  profitable.26  The  revenue  of  a  CCP  derives  from  fees  charged  for  clearing, 
penalties  on  late  settlement  and  from  earnings  on  collateral  supplied  by  clearing 
members. Publicly available figures suggest that equity CCPs typically derive about 80% 
of  their  revenue  from  fees  and  20%  from  net  interest  earnings.  CCPs  that  clear  fixed 
income and derivative instruments derive a significantly higher portion of their revenue, 
over  40%,  from  net  interest  earnings  as  the  transactions  based  on  these  asset  classes 
require a greater amount of collateral from the clearing members. 

3.2  Overview of legislative framework 

In  force  since  August  2012,  EMIR  requires  CCPs  to  observe  high  prudential, 
organisational  and  conduct  of  business  standards.  National  supervisors  are  tasked  with 
the  full  oversight  of  their  activities.  In  response  to  the  G20  commitment,  EMIR  also 
requires standardised OTC derivatives to be centrally cleared in a CCP.  

23   See annex VI. The list of CCPs can also be found at: 

Http://mifiddatabase.esma.europa.eu/Index.aspx?sectionlinks_id=24&language=0&pageName=CENT
RAL_COUNTERPARTIES_Display&subsection_id=0  

24   Based on comparative tables for securities clearing statistics, European Central Bank statistics, Table 2 
and  3  at:  http://sdw.ecb.europa.eu/reports.do?node=1000001583.  The  figures  are  computations  of  all 
the domestic figures as no aggregated figure is available. 

25   See  table  14  in  "Market  structure  developments  in  the  clearing  industry:  implications  for  financial 
stability  Report  of  the  Working  Group  on  Post-trade  Services",  Bank  for  International  Settlements, 
November 2010, p64. http://www.bis.org/publ/cpss92.pdf. See also annex VI 

26   Jean-Sébastien  Fontaine,  Héctor  Pérez  Saiz  and  Joshua  Slive,  ”When  Lower  Risk  Increases  Profit: 
Competition  and  Control  of  a  Central  Counterparty,”  Bank  of  Canada  Working  Paper  2012-35, 
November  2012  http://www.bankofcanada.ca/wp-content/uploads/2012/11/wp2012-35.pdf;  “Profits 
surge  at  Ice's  EU  clearing  house,”  Financial  News  13  March  2014;  “LSE  earns  more  from  profit-
sharing deal at clearing house,” Financial Times 13 November 2013 

9 

 
 
 
                                                            
In line with international standards,27 EMIR requires CCPs to have adequate operational 
contingency  arrangements,  including  to  ensure  that  losses  arising  from  the  possible 
default  of  two  members  (i.e.  a  default  event)  can  be  covered  by  the  margin  of  the 
defaulted members and a default fund, which is financed through contributions collected 
from  the  CCP's  members,  as  well  as  other  own  resources.  In  addition,  CCPs  that  are 
interoperable  with  other  CCPs  are  required  not  only  to  collect  margin  from  their 
members to cover against risks on their platform, but also to exchange margin between 
each other. A predefined “waterfall” of financial resources determines the order in which 
margins, default fund contributions and other resources, such as shareholder equity, are 
called upon to absorb losses.28 A CCP typically reinvests the contributions collected from 
its members. However, any reinvestment must be available promptly and therefore must 
be made in highly liquid financial instruments. EMIR accordingly sets out limitations on 
the  types  of  investments  that  a  CCP  can  make.  It  also  sets  out  the  specific  capital 
requirements applicable to CCPs that aim to, inter alia, ensure that a CCP is adequately 
protected  against  risks  not  covered  by  its  default  waterfall  (i.e.  other  (non-default) 
events). These include business, legal and operational risks. The resources ought also to 
enable the CCP to be wound-up or restructured over an appropriate time span; however, 
these are taken to be used primarily for the purposes of a gradual wind-up due to general 
business losses rather than for constituting adequate reserves to cover losses in a scenario 
where losses arise quickly29 (for instance in relation to, for example, cyber-attacks, fraud 
or investment losses).   

Recognising the systemic role of CCPs, the BRRD also provides safeguards that seek to 
avoid the failure of an EU bank or EU investment firm, typically the clearing members of 
CCPs, resulting in unmanageable losses for CCPs. For example, these institutions would 
have to continue to honour, during their resolution, their obligations towards CCPs even 
as obligations towards other creditors could be suspended.30The institutions’ obligations 
to CCPs and other financial market infrastructures maturing in less than seven days are 
also  excluded  outright  from  bail-in  to  protect  their  functioning.31  Beyond  this,  while 
CCPs are not excluded from potentially suffering losses on their outstanding exposures in 
relation  to  a  failed  bank,  banks’  obligations  to  CCPs  and  other  financial  market 
infrastructures  are  mentioned  explicitly  among  the  liabilities  which  could  be  exempted 
from bail-in for overwhelming financial stability reasons.32 As a result, the likelihood of 
CCPs' incurring large losses in the event of the failure of an EU clearing member bank or 
EU investment firm is substantially reduced. However, certain CCPs, in particular those 
which  have  non-EU  clearing  member  banks  as  well  as  those  which  clear  commodity 
trades,  might  have  non-financial  entities  as  clearing  members  (such  as  energy 
companies),  whose  potential  failure  would  not  be  fully  subject  to  these  BRRD 
safeguards.  

27   Principles for Financial Market Infrastructures by the Committee on Payment and Settlement Systems 
and the Technical Committee of the International Organisation of Securities Commissions  (April 2012) 
http://www.bis.org/publ/cpss101a.pdf  

28   See annex IX for a general discussion on how the waterfall works. 
29   EMIR Article 16 and Commission Delegated Regulation (EU) No 152/2013 supplementing EMIR with 
regard  to  regulatory  technical  standards  on  capital  requirements  for  central  counterparties  http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0037:0040:EN:PDF  

30   BRRD Articles 69, 70, 71, 80 
31   BRRD Article 44(2)(f)  
32   BRRD Article 44(3)(c) 

10 

 
 
 
                                                            
Recovery and resolution measures for CCPs aim to complement, not  duplicate, aspects 
of the existing EMIR framework. They would further bolster  the preparedness of CCPs 
to mitigate financial stress, provide authorities with further insight into the operations of 
the firms within their jurisdictions and provide them with a set of powers to deal with the 
declining  health  of  a  firm  in  a  coordinated  manner  and,  where  necessary,  resolve  the 
firm, restoring its critical functions preserving financial stability, and minimising the cost 
to taxpayers. The authorities would only resort to resolution powers, if normal insolvency 
proved to be insufficient to meet these aims.33 

Box 1 –Recovery and resolution regime for CCPs in the EU 

No  Member  State  has  yet  developed  a  full  national  regime  for  CCP  recovery  and 
resolution. However, the United Kingdom (UK), Italy, France and Germany have partial 
regimes, where their effectiveness is uncertain. 

The UK 

Through a series of amendments to existing legislation between 2011 and 2013, the UK 
has introduced a number of measures to recover and resolve CCPs established in the UK. 
They  have  required  CCPs  to  draw  up  recovery  plans  and  establish  loss  allocation 
provisions,  which  would  be  exercised  once  the  default  resources  required  under  EMIR 
are exhausted34. The CCP supervisor – the Bank of England – may exercise an overriding 
power of direction for broader financial stability reasons (beyond compliance with EMIR 
and UK prudential requirements) which might be used, for example, to direct a CCP not 
to  use  its  loss  allocations  to  tear  up  all  contracts  in  a  service.  Furthermore,  during  the 
resolution of the CCP, the resolution authority – a functionally separate area of the Bank 
of  England  –  would  be  availed  with  the  ability  to  sell  part  or  the  whole  of  the  CCP 
business  to  a  solvent  purchaser  and  to  establish  a  bridge  institution. A  safeguard  exists 
regarding  the financial interests  of those  affected by transfer orders made  in relation to 
CCP resolution, whereby HM Treasury (the finance ministry) may make a compensation 
order in exceptional circumstances relating to CCPs. 

UK legislation establishes that the resolution objectives are, with no order of priority, to 
maintain  the  continuity  of  CCP  clearing  services;  protect  public  funds;  avoid,  to  the 
extent possible, interfering with property rights; protect and enhance the stability of the 
financial systems of the UK; and protect and enhance public confidence in the stability of 
the financial systems of the UK.  

The  use  of  any  resolution  power  is  deemed  to  be  a  last  resort  measure,  but  can  be 
effected prior to insolvency. In this light, prior to their use, the resolution authority would 
have  to  determine  that:  (a)  a  CCP  is  failing,  or  likely  to  fail,  to  satisfy  the  recognition 
requirements;35 and (b) having regard to timing and other relevant circumstances, it is not 
reasonably  likely  that  (ignoring  the  resolution  powers)  action  will  be  taken  by,  or  in 
respect  of,  the  CCP  that  will  enable  the  CCP  to  maintain  the  continuity  of  any  critical 

33   It is recalled that insolvency regimes are not harmonised across the EU. Regulation (EC) No 1346/2000 
on  insolvency  proceedings  determines  which  national  insolvency  regime  applies  should  a  company 
including a CCP or a CSD with a cross-border presence within the EU fail.  
34   See section 3 of http://www.legislation.gov.uk/uksi/2013/1908/contents/made 
35   The  term  “recognition  requirements”  means  the  requirements  resulting  from  section  286  of  the 

Financial Services and Markets Act 2000. 

11 

 
 
 
                                                            
clearing  services36  it  provides  while  also  satisfying  the  recognition  requirements.  HM 
Treasury would have to further determine that it would be in the public interest to place 
the CCP in resolution rather than insolvency. 

The UK recovery and resolution regime for CCPs are in line with the FSB key attributes; 
however, to be fully compliant loss absorption measures would need to be implemented. 

Italy 

Italy, in 2007, extended their resolution framework for financial market infrastructure to 
CCPs,  which  includes  regimes  for  Special  Administration  (with  the  purpose  of 
continuing the CCP) and for Compulsory Administrative Liquidation (i.e. winding up). 

A  CCP  could  enter  into  the  Special  Administration  regime  (SAR)  if  there  have  been 
serious  irregularities  in  the  management  of  the  CCP  and  /  or  serious  capital  losses. 
Whereas,  a  CCP  could  be  placed  under  the  Compulsory  Administrative  Liquidation 
regime  (CALR)  if  the  Bank  of  Italy  has  withdrawn  its  authorisation  or  the  courts  have 
declared the CCP to be insolvent. As part of this regime, the operations of the CCP are 
frozen, all CCP payments are suspended, and contacts are terminated. The Bank of Italy, 
the  designated  resolution  authority,  may  permit  operations  to  continue  on  a  temporary 
basis. 

The Bank of Italy, the designated resolution authority, in both cases would have a wide 
discretion  of  powers.  It  could,  for  example,  direct  the  activities  of  the  special 
administrator  or  commissioner  appointed  under  the  SAR  and  require  that  it  has  to 
provide prior consent for any initiative taken by the liquidator. However, as initial margin 
is bankruptcy remote it would not be touched in either regime. Other powers include, the 
ability  to  enforce  cash  calls  as  well  as  any  previously  agree  position  allocation 
mechanisms  (such  that  non-defaulting  clearing  members  take  on  the  positions  of  the 
defaulted clearing member(s)).  

France and Germany 

In  France  and  Germany,  CCPs37  are  required  to  have  a  bank  licence.  As  such,  their 
authorities  would  be  able  to  exercise  the  powers  available  to  them  under  the  BRRD. 
However, as all BRRD tools would not be suitable for the resolution of CCPs the regime 
would not be effective.   

3.3  Problem definition 

This section outlines the problems posed by the absence of appropriate powers and tools 
to prevent and mitigate the failure of CCPs from jeopardising financial stability38.  

36   The  term  “critical  clearing  services”  means  central  counterparty  clearing  services  the  withdrawal  of 
which  may,  in  the  Bank  of  England’s  opinion,  threaten  the  stability  of  the  financial  systems  of  the 
United Kingdom. 

37 LCH.Clearnet SA in France, and Eurex Clearing and ECC 
38   See also section 7.2. of the Economic Review of the Financial Regulation Agenda, SWD  (2014) 158  
http://ec.europa.eu/internal_market/finances/docs/general/20140515-erfra-working-document_en.pdf   
12 

 
 
 
                                                            
?
d
e
v
l
o
v
n
i

s
i
o
h
W

s
e
i
t
i
r
o
h
t
u
a
d
n
a

s
P
C
C

s
e
i
t
i
r
o
h
t
u
A

e
n
i
l
e
m
T

i

L
L
A
R
E
V
O

N
O
I
T
A
R
A
P
E
R
P

N
O
I
T
N
E
V
R
E
T
N

I
Y
L
R
A
E

N
O
I
T
U
L
O
S
E
R

Problem tree 

PROBLEM DRIVERS 

PROBLEMS 

Financial risk concentration in CCPs, 
including from increasing 
interconnections between all major 
financial institutions and CCP, which may 
threaten orderly functioning of financial 
markets if a CCP were to default 

CCPs and authorities unprepared for 
potential crisis situations and authorities 
do not have tools and powers to improve 
ex-ante recoverability and resolvability of 
CCPs 

CCP supervisors unable to mitigate risks 
associated with crisis situations  

Variant use of  early intervention tools 
where they exist  

Uncertainties about the time required to 
ensure solvency of the CCP and continuity 
of its critical services 

Lack of authorities responsible for CCP 
resolution  

Impingement of Single Market due to 
misalignment between national 
responsibility of resolution authorities and 
cross-border nature of the industry  

Uncertainty for owners and creditors of 
when a CCP would be resolved 

Owners, clearing members, clients treated 
differently in each jurisdiction due to 
divergent or lack of effective resolution 
tools & powers & legal, operational and 
structural impediments to resolution  

N
O
I
T
A
C
O
L
L
A
T
S
O
C

Taxpayers, not owners or 
creditors, pay to prevent the 
disorderly failure of CCPs 

Divergent national policies 
concerning financing of crisis 
situations (where available) 

Conflicting interests of Member 
States concerning financing of 
crisis situations 

Disorderly failure of CCP, 
spreading contagion and 
risking taxpayer bail outs 

Suboptimal level of 
preparedness of supervisors 
and CCPs to tackle an 
extremely severe crisis 
triggered by a failure & 
structural, legal and 
operational impediments 
reducing authorities' and 
CCPs’ ability to intervene 

Suboptimal early 
intervention arrangements 
for supervisors 

Suboptimal level of 
cooperation between 
authorities responsible for 
CCP resolution 

Inefficient CCP crisis 
resolution process and 
suboptimal outcomes 

Potential use of public funds 
in crisis situation  

National systems (if 
available) not calibrated to 
ensure an optimal and even 
level of protection of 
financial stability across 

13 

Consequence
s 
Inefficient 
markets with a 
misalignment 
of risk & 
reward 

Increased risks 
to financial 
stability 

Reduced 
economic and 
social welfare, 
taxpayers 
bearing 
unacceptable 
costs of failure   

Fragmentation 
of the internal 
market 

 
 
 
      
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Why is there need for action? 

CCPs are market infrastructures that improve the efficiency of financial trading through, 
for  example,  addressing  information  asymmetries  and  reduce  complexity,  as  well  as 
mitigate  and  manage  counterparty,  liquidity  and  operational  risks.39  This  proved 
particularly  valuable  during  the  financial  crisis;  while  a  significant  number  of  defaults 
could  be  observed  in  bilaterally  traded  OTC  derivatives,  this  was  not  the  case  for 
centrally cleared contracts. As a direct result of regulatory requirements, like EMIR, the 
importance  of  CCPs  further  expands.40  The  mandatory  centralised  clearing  of  OTC 
derivatives should mitigate the overall risks linked to these derivative transactions, which 
have more often than not taken place on a bi-lateral basis, and should consequently result 
in net benefits of roughly 0.12% of EU GDP per year.41  

Given the centrality of CCPs to the financial system, the increasing systemic importance 
of  CCPs  gives  rise  to  concerns.  As  such,  CCPs  have  themselves  become  a  source  of 
macro-prudential risk, as their failure could cause significant disruption to the financial 
system42 and would have systemic effects. For instance, mass, uncontrolled termination 
and close out of contracts cleared by CCPs could lead to liquidity and collateral strains 
across  the  market,  causing  instability  in  the  underlying  asset  market  and  the  wider 
financial  system.  Like  some  other  financial  intermediaries,  CCPs  are  also  potentially 
susceptible to “runs” due to clearing members losing their confidence in the solvency of 
the  CCP.  This  could  create  a  liquidity  shock  for  the  CCP  as  it  attempts  to  meet  its 
obligations to return the principal collateral (i.e. initial margin). To counter this, some of 
their  members  and  other  participants  (i.e.  the  clients  of  clearing  members)  note  that 
greater transparency regarding, for instance, the size of the margin pool  at the CCP and 
the  other  elements  of  CCP  default  waterfalls43  would  reduce  their  vulnerability  to 
destabilising  runs,  as  such  transparency  would  allow  clearing  members  and  clients  to 
better assess their exposures at all times44.  

CCPs or their clearing members may also face acute liquidity strains during periods when 
credit  or  funding  markets  are  disrupted.  A  CCP  trying  to  liquidate  a  defaulted  clearing 
member’s  initial  margin  (i.e.  principal  collateral),  to  for  example  meet  the  variation 
margin obligations of the defaulted clearing member, under these conditions might have 
to  sell  it  at  fire  sale  prices,  thereby  exacerbating  the  losses  imposed  on  the  CCP  and 
perhaps  even  resulting  in  a  CCP  default,  as  it  is  unable  to  meet  the  obligations  of  the 
defaulted member (which it has assumed), even with the resources available to it under 
the default waterfall. Fire sales can dislocate and create further panic in already stressed 

39   Craig  Pirrong,  “The  Economics  of  Central  Clearing:  Theory  and  Practice”,  ISDA  Discussion  Papers 

Series No.1, May 2011.  

40   Data on European CCPs and recent trends in the increase in OTC clearing are provided at annex VI. 
41   See  Commission  Staff  Working  Document,  “Economic  Review  of  the  Financial  Regulation  Agenda” 
SWD  (2014)  158,  section  4.3.2  http://ec.europa.eu/internal_market/finances/docs/general/20140515-
erfra-working-document_en.pdf    

42   See  e.g.  Paul  Tucker;  “Are  clearing  houses  the  new  central  banks?”  Over-the  counter  derivatives 

symposium, Chicago, April 2014; 
http://www.chicagofed.org/digital_assets/others/events/2014/annual_over_the_counter_derivatives_sy
mposium/tucker_clearinghouses_new_central_banks_tucker_2014.pdf  
43   See annex I for a glossary of terms commonly used in this impact assessment 
44   See 

JP  Morgan,  ”What 

for  CCPs,”  September  2014  

resolution  plan 

e.g. 

the 

is 

http://www.jpmorganchase.com/corporate/About-JPMC/document/resolution-plan-
ccps.pdf?M=22b2d037-ca48-42e1-a49e-53a5e0667db4  

14 

 
 
 
                                                            
 
asset  markets,  thereby  creating  losses  for  and  imposing  costs  on  other  market 
participants. Similarly, a CCP might not be able to obtain credit via private transactions, 
or may only receive it at punitive rates (or haircuts). 

The  increasing  systemic  importance  of  CCPs  can  be  categorised  in  terms  of:  (i)  the 
increasing amounts centrally cleared, (ii) concentration risk and (iii) contagion effects. 

(i)  Increased  volumes  centrally  cleared  transactions:  as  intended  by  regulators,  large 
shares of OTC derivatives transactions are already centrally cleared (see section 3.1 and 
annex VI).  

(ii) Concentration risk: the concentration risk associated with a CCP arises almost as a 
natural  consequence  of  its  features,  namely  by  becoming  critical  nodes  in  the  financial 
system.  The  notional  amounts  referenced  above  are  cleared  through  a  small  number  of 
available  CCPs.  For  instance,  in  the  EU,  six  CCPs  exist  for  credit  products  and  fifteen 
exist  for  interest  rate  products.  In  the  US,  there  are  five  and  nine  authorised  CCPs  for 
these  two  product  types,  respectively.  The  degree  of  concentration  also  depends  on  the 
structure  of  the  underlying  markets.  Another  factor  is  that  due  to  the  complexity  of 
derivatives  markets,  a  limited  number  of  CCPs  (from  a  cost  perspective)  specialise  in 
dedicated products; which in turn tends to add to concentration of the sector.45 Publically 
available data on clearing members per CCP appear to confirm this picture. For example, 
Bank of England supervised CCPs have between 18 and 98 clearing members, depending 
on the product type.46 (See also annex VI, part E that shows which G-SIBs are members 
of which CCPs.) 

(iii)  Direct  and  indirect  contagion:  the  expansion  of  the  use  of  central  clearing  will 
fundamentally  alter  the  topology  of  the  global  financial  system,  with  CCPs  becoming 
even  more  crucial  nodes  of  activity,  where  all  major  financial  institutions  will  be 
interconnected  via  their  (direct  and  indirect)  linkages  to  CCPs.  Central  clearing  thus 
reconfigures  interconnections  and  counterparty  risk  between  systemically  important 
financial  institutions  in  favour  of  centralised  risk  management  such  that  these  risks  are 
mutualised  and  offset  against  each  other  during  normal  day-to-day  practices.  In  this 
context, the failure of a CCP could result in widespread financial contagion as a financial 
problem in one institution is  propagated to  many  other institutions via their linkages  to 
the CCP's different contagion channels. 

CCP failures  

A  CCP  may  enter  into  financial  distress  as  a  result  of  (i)  clearing  member  default  (i.e. 
default events) or (ii) due to business, legal or operational reasons, such as losses on the 
CCP’s investments, or due to fraud or cyber-attacks (i.e. other (non-default) events).  

Failures  of  significant  CCP  clearing  members  have  happened  several  times  during  the 
last  25  years.  CCPs  have  had  to  manage  defaults  of  Drexel  Burnham  Lambert  (1990), 

45   Cf. ESRB Macro-prudential commentary No 6 (2013), page 2. 
46   Cf. The Bank of England's supervision of financial market infrastructures – Annual Report (2015), page 22. 

15 

 
 
 
                                                            
Barings  (1995),  Griffin  (1998),  Enron  (2001),  Refco  (2005),  Lehman  Brothers  (2008) 
and MF Global (2011).47  

Going back further in history, evidence can also be found that CCPs had been placed in 
insolvency, even before OTC derivatives were required to be cleared by CCPs, due to a 
combination of improper risk management practices and the default of CCP participants. 
For  instance,  Caisse  de  Liquidation  (Paris)  in  1974,  the  Kuala  Lumpur  Commodity 
Clearing House in 1983 and the Hong Kong Futures Guarantee Corporation in 1987. 48 A 
near failure was experienced with the Chicago Mercantile Exchange (CME) in October 
1987.  (See  annex  X  for  further  details  on  default  events.)  The  failure  of  these  CCPs, 
which  happened  during 
times  where  financial  markets  were  not  as  globally 
interconnected or complex as now, led to, for example the closure of the sugar market for 
two years and government bail-outs.  

Current risk mitigation techniques  

As mandated by EMIR, ESMA is currently developing a framework for stress testing EU 
CCPs.  These  tests  will  examine,  inter  alia,  the  limitations  of  each  CCP's  default  fund 
protection,  to  identify  the  scenarios  under  which  a  CCP's  default  resources  would  be 
exhausted. This data has not been available at the time of drafting this impact assessment; 
hence it has relied on external studies. 

The  already  quoted  October  2014  Financial  Stability  Paper  by  the  Bank  of  England49 
examines  whether  the  "cover  2"  requirement  (the  EMIR requirement  whereby  the CCP 
should  have  sufficient  resources  to  meet  the  default  of  the  largest  one  or  two  clearing 
members) remains prudent enough if the number of members of a CCP or the distribution 
of  exposures  among  members  changes.  It  uses  a  market-consistent  approach,  which  is 
based on actual stressed losses over initial margins and default estimates, as well as an 
analytical  approach,  based  on  theoretical  loss  distributions.  Both  methods  suggest  that 
"cover 2" is a sufficiently prudent for most risk distributions found in practice. However, 
the  requirement  might  represent  a  significantly  weaker  safety  net  if  the  distribution  of 
exposures  among  its  clearing  members  becomes  more  uniform.  For  these  distributions, 
the paper concludes that higher financial resources might be needed to ensure robustness 
of  CCPs.  Simulations  from  CCPs,  based  on  their  own  exposure  data,  demonstrate  that 
such  scenarios  under  which  all  defaulters'  funded  resources  would  be  exhausted  go 
beyond relevant historical stress events, including the recent financial crisis.50  

Hence, this impact assessment notably considers proposals for resolution tools which are 
different  and  independent  from  increased,  EMIR  pre-funded  financial  resources  to 
address  these  tail-risk  events  cost-effectively.  Further  quantitative  analysis  of  potential 
losses  and  their  effects  could  be  possible  in  the  future  once  the  ESMA  stress  tests 

47   Cf.  IMF  working  paper  15/21  (2014)  'Central  Counterparties:  Addressing  their  Too  Important  to  fail 
Nature', page 11. It is noted that almost all of these cases could be solved by closing out or transferring 
the positions of defaulters, without impacting other clearing members.  

48   Ibid. 
49   Ibid, page 7. 
50   Cf.  CME  group,  Balancing  CCP  and  Member  Contributions  with  Exposures  (2014),  page  3,  or  LCH 

Clearnet: CCP Risk Management, Recovery and Resolution (2014), page 13. 

16 

 
 
 
                                                            
conclude  and  CCPs  publish  further  data  on  their  default  waterfalls  as  per  requirements 
issued by CPMI-IOSCO51. 

Stakeholder views  

Respondents  (a  mix  of  CCPs,  clearing  members  and  clients)  to  the  Commission’s 
consultation  agreed  that  CCPs  are  systemically  relevant  as  they  are  critical  financial 
market  infrastructure,  implying  the  need  for  effective  recovery  and  resolution 
arrangements  that  are  consistent  with  the  FSB  globally  agreed  principles.52  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  to  address 
this source of systemic risk. Almost all stakeholders (with the notable exception of some 
clients of clearing members) agreed that, to safeguard financial stability, the continuity of 
key operations of CCPs should be the priority. All agreed that the costs of a CCP failure 
should not fall on taxpayers. Many considered that while it will be critical to ensure that 
recovery and resolution arrangements for CCPs are credible and robust, these should not 
place  excessive  burdens  on  members  or  their  clients  to  cover  potentially  significant 
liabilities  arising  from  the  default  of  a  major  clearing  member  (i.e.  default  events)  or, 
even  less,  for  those  arising  from  internal  CCP  risk  management  errors  (i.e.  other  (non-
default) events).  

The benefits of central clearing for the overall stability of financial markets are beyond 
doubt.  The  G20  aim  of  greater  CCP-clearing  to  mitigate  the  systemic  risk  inherent  in 
otherwise  poorly  overseen  networks  of  opaque  bilateral  transactions  is  not  put  into 
question.  Empirical  cases  of  CCP  failure  are  few  but  do  exist.  In  any  case,  the  above 
scenarios of CCPs encountering and spreading overwhelming financial difficulties should 
not  be  neglected,  in  particular  in  a  world  where  financial  markets  are  globally 
interconnected. The failure of a CCP would expose clearing members and their clients to 
potentially  large  losses  and  a  cessation  of  CCP  services  could  deprive  market  these 
participants of basic functions, thereby leading to a possible shutdown of entire markets 
(as was with the case of the failure of Caisse de Liquidation), with knock-on effects even 
on markets not directly affected and spill-overs for the real economy.  

Benefits of the proposal 

It is difficult to extrapolate these potential direct and indirect losses from a CCP failure in 
the abstract. However, it can be assumed – as a minimum – that the net benefits which 
have  been  estimated  to  flow  from  greater  CCP-clearing  of  OTC  derivatives  (0.12%  of 
GDP)  would  be  foregone.  No  firm  publicly  available  estimates  exist  for  the  additional 
losses and costs which could result from contagion and the uncertainty caused by a CCP 
failure,  but  the  impact  of  one  could  be  comparable  to  the  costs  of  a  systemic  banking 
crisis. The present value of output losses in atypical banking crisis has been estimated to 
be 60% of one year’s GDP53. The sections and sub-sections above outline some thoughts 
on  losses  and  impacts  in  a  scenario  of  CCP  distress  or  failure,  against  which  the  loss 

51   “Public quantitative disclosure standards for central counterparties,” CPMI-IOSCO, February 2015 
52   Indeed,  respondents  largely  agreed  that  most  of  the  FSB  “Key  Attributes  of  Effective  Resolution 

Regimes for Financial Institutions” are relevant for CCPs. 

53   See  Commission  Staff  Working  Document,  “Economic  Review  of  the  Financial  Regulation  Agenda” 
SWD  (2014)  158,  section  4.3.2  http://ec.europa.eu/internal_market/finances/docs/general/20140515-
erfra-working-document_en.pdf   

17 

 
 
 
                                                            
allocation  mechanisms  of  a  recovery  and  resolution  regime  could  be  assessed  and 
justified,  in  particular  for  such  a  tail-event.  They  set  out  that,  in  the  rare  event  of  such 
extreme  losses,  rather  than  relying  on  higher  capital  and  collateral  requirements  in  a 
precautionary  but  arguably  uneconomical  way,  recovery  and  resolution  tools  would  be 
useful  means  to  spread  these  losses  in  an  equitable  way  and  to  safeguard  financial 
stability.   

Albeit  difficult  to  quantify,  the  proposed  recovery  and  resolution  framework  for  CCPs 
would  deliver  the  following  three  main  goals,  similar  to  those  identified  in  the  case  of 
banks.54  

1.  Overcoming  the  suboptimal  preparation:  CCPs  are  subject  to  stringent  prudential 
requirements  pursuant  to  EMIR.  However,  there  is  no  uniform  and  enforceable 
standard  requiring  CCPs  and  authorities  to  prepare  contingency  arrangements  and 
plans  for  orderly  recovery  and  resolution  to  avert  crises  at  CCPs  from  threatening 
financial  stability,  including  for  situations  where  prudential  requirements  would 
prove insufficient to cover the increasing financial risk concentration in CCPs in the 
event  of  failure.55  As  a  result  of  this  absence  of  comprehensive  recovery  and 
resolution planning, CCPs and authorities are not fully prepared for a potential CCP 
crisis, and as such do not have the necessary powers to improve resolvability ex-ante 
in case of failure, and have few means to effectively secure the continuity of CCPs’ 
critical functions in such a scenario. The result is that CCPs and their authorities are 
sub-optimally  prepared  for  extreme  crises  and  a  legally  and  operationally  deficient 
framework to allow for effective intervention when necessary.   

2.  Enhancing  the  currently  inadequate  means  of  early  intervention:  Member  State 
authorities have variant powers to intervene in the operation of CCPs before terminal 
problems crystallise, either before or during the CCP's default management process. 
As a result, authorities may take very divergent, ad hoc, uncoordinated measures and 
at  different  times  in  their  efforts  to  restore  the  viability  of  the  CCP  or  to  prevent 
actions taken by the CCP that could compromise financial stability. This suboptimal 
intervention framework means that avoidable failures or measures counter to overall 
financial  stability  may  occur.  Through,  for  example,  defining  specific  tools  that 
could complement the CCP’s default waterfall and their criteria for use or providing 
authorities with  powers  that  require  changes  to  the  CCP’s  management  or  targeted 
changes  to  specific  collateral  arrangements  which  may  be  causing  problems,  some 
failures could be averted. 

3.  Introducing an efficient framework for resolution: most Member States authorities 
do not have either the clear jurisdiction or a comprehensive framework to resolve a 
CCP.56  Their  absence,  as  learnt  through  the  pains  of  the  recent  banking  crisis,  can 
result  in  some  authorities  being  unable  to  take  the  required  measures  or  others 

54   See Impact Assessment accompanying the Commission proposal for a Bank Recovery and Resolution 

Directive http://ec.europa.eu/internal_market/bank/docs/crisis-
management/2012_eu_framework/impact_assessment_final_en.pdf  

55   Some  Member  States  (e.g.  the  UK)  have  adopted  requirements  for  CCPs  to  have  recovery  plans  and 
loss allocation provisions beyond the default resources required under EMIR. Others are in the process 
of requiring recovery plans as per the Principles for Financial Market Infrastructures and Key Attributes 
(see section 3.2).   

56   See Box 1 in section 3.2.     

18 

 
 
 
                                                            
choosing  to  intervene  at  different  times,  leading  to  disorderly  and  misaligned 
national  approaches,  legal  uncertainties  and  ineffective  resolution  of  CCP,  in 
particular  for  those  with  operations  in  multiple  jurisdictions.  Differing  and  uneven 
measures would also lead to frustrating efforts to stabilise the critical operations of a 
CCP  and  critically  impair  its  functioning,  jeopardising  financial  stability  and  the 
integrity of the Single Market. The absence of a harmonised framework would also 
mean that the owners and creditors (including the clearing members and clients) of 
CCPs  contributing  unevenly  to  the  costs  of  resolution,  where  some  might  not  bear 
any loss as States intervene to continue critical functions. Other could fare better off 
than  if  the  CCP  gone  into  insolvency,  but  most  would  probably  be  worse  off. 
Without  a  structured  resolution  framework,  they  would  also  be  subject  to  a  high 
degree  of  uncertainty,  which  in  turn  could  lead  to  lack  of  market  confidence, 
contagion  and  other  secondary  effects  caused  by  CCP  failure.  Furthermore,  the 
owners and creditors could be exposed to differential treatment across borders and in 
uncoordinated attempts by national authorities to minimise losses for some groups of 
stakeholders; undermining the integrity of the Single Market. Without greater clarity 
of  their  potential  exposures,  clearing  members’  incentives  to  monitor  the  risk  they 
bring  to  the  CCP  would  be  distorted.  On  the  whole,  this  constitutes  a  suboptimal 
framework to tackle the failure of a  CCP, resulting in inefficient markets, as well as 
an unfair and uneven allocation of losses and costs among CCP owners and creditors 
and  taxpayers,  and  which  might  even  compel  authorities  to  deploy  public  funds  in 
differing ways to continue critical functions and to fill any funding gaps or provide 
for compensation. 

Taken  together,  the  absence  of  clear  and  harmonised  provisions  for  preparation,  early 
intervention  and  resolution  in  case  of  CCP  failure  would  impose  significant  socio-
economic  costs.  The  uncertainty  over  available  means  to  tackle  a  CCP  crisis  generates 
risks for financial stability, can cause damaging levels of fragmentation for the internal 
market and result in acute moral hazard if there is no alternative to taxpayer bailout. This 
uncertainty  is  also  evident  in  stakeholders’  disparate  views.  While  authorities,  CCPs, 
clearing  members,  and  their  clients  generally  agree  that  the  threat  of  CCP-failure  is  a 
major problem, they do not all agree on how best to address it and how costs should be 
distributed in order to preserve financial stability (see section 6.6 and annex XI part B), 
as each grouping considers that the other should bear any cost.     

4  THE EU'S RIGHT TO ACT AND JUSTIFICATION  

EU  financial  markets  are  open  and  integrated.  CCPs  are  able  to  operate  and  provide 
services  cross-border.  In  the  process,  they  link  multiple  financial  actors,  counterparties 
(i.e. clearing members, typically large banks) and clients throughout the Single Market. 
Due to this advanced and multi-layered cross-border integration of the financial sector, a 
resolution and recovery framework for CCPs is needed that mirrors the integration of the 
business. Only EU action can ensure that CCPs and their clearing members are subject to 
adequate  and  effective  intervention  to  mitigate  or  address  a  crisis  situation,  as  well  as 
adequate safeguards.  

The  recent  crisis  demonstrated  how  ill-equipped  Member  States,  their  authorities  and 
central  banks  were  in  dealing  with  preventing  and  subsequently  addressing  the 
crystallisation of risks in banks and, in particular, in a coordinated manner when dealing 
with a bank with operations in more than one Member State. A number of governments 
19 

 
 
 
had to enact emergency legislation to equip their authorities with powers to deal with the 
disorderly failure of systemic banks or had to take such banks into public ownership to 
stem contagion. Central banks were also compelled to pump liquidity into the system to 
prevent further contagion due to the whole system seizing up.  

Without  a  uniformed  approach  (across  the  EU  and  globally,  brought  about  by  the  FSB 
key  attributes  to  effective  resolution  regimes  and  the  EU  bank  recovery  and  resolution 
directive),  as well as  political  drive to  rule out  any further use  of taxpayers monies for 
public bailouts (as far as possible) (including through the adoption of the BRRD), market 
fragmentation may have exacerbated.   

From  this  hindsight,  it  is  clear  that  the  current  tools  available  to  Member  State 
authorities,  if  any,  are  inadequate  to  deal  with  CCPs  that  face  significant  distress  that 
could  compromise  the  viability  of  the  entity.  Where  they  exist,  they  are  limited  to  the 
entity’s  internal  arrangements  or  are  nationally  based.  The  divergent  approaches,  by 
which  CCPs  and  authorities  mitigate  or  tackle  the  problems  within  the  CCP  facing 
financial  distress  or  on  the  verge  of  failure,  could  ultimately  lead  to  the  disruption  of 
critical  functions  for  the  economy  and  wider  financial  instability.  EU  level  action  is 
therefore 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  (e.g.  the  supervisors  of  the  clearing  members  and  any  associated  trading 
venue), whether they be in the same Member State or another. This would, for example, 
reduce the possible arbitrary effects when a CCP has clearing members in Member States 
other than the Member State where it is established.  

As a CCP fails, each national authority of the constituent parts of a CCPs business (e.g. 
the  clearing  member  and  the  trading  venue)  would  likely  pursue  different  objectives. 
Consequently, Member State authorities and market participants would not be guaranteed 
that  critical  problems  arising  from  a  crisis  situation  can  or  will  be  solved  fairly, 
effectively and expediently. EU-level action is warranted also for CCP failures that may 
not  have  direct  cross-border  effects,  but  where  harmonisation  would  mitigate  possible 
level  playing-field  and  competition  concerns  arising  from  the  prospective  and  actual 
national handling of crises arising from a CCP failure. For example, if national regimes 
were  to  legislate  differing  resolution  regimes,  with  a  varying  degree  of  potential  state 
intervention with public funds, those which are less costly on the CCP and the clearing 
members (i.e. those which would unlikely eradicate any degree of state funds being used 
should  the  CCP  fail)  would  attract  more  business  to  the  CCPs  in  that  jurisdiction. 
Additionally, without EU-level actions, some jurisdictions may not adopt any form of a 
recovery  and  resolution  regime,  and  due  to  the  integration  of  the  Single  Market,  the 
failure  of  a  CCP  in  a  jurisdiction  without  such  effective  tools  would  likely  resonate 
throughout the Union. However, while a CCP may primarily serve its domestic market, it 
is unlikely that all of its clearing members and their clients would be located in the same 
Member State. Therefore, there will always be a cross-border dimension if a CCP were to 
fail.   

Some  Member  States  have  already  enacted  legislative  changes  specifically  to  avert 
potential  solvency  problems  in  CCPs  or  as  part  of  broader  resolution  regimes  for  the 

20 

 
 
 
financial  sector57.  However,  the  cross-border  effectiveness  or  their  overall  adequacy  is 
questionable.  The  majority  of  Member  States  do  not  have  specific  or  comprehensive 
resolution regimes for CCPs. The inability of Member States to take control of a failed 
CCP  and  resolve  it  effectively  would  undermine  Member  States'  mutual  trust  and  the 
integrity  of  the  Single  Market.  The  uncertainty  over  how  the  failure  of  key  market 
infrastructures could be managed in the absence of an EU-wide framework is cited as one 
reason for the lag in the pace of integration in Europe’s capital markets.58 Clarity on the 
content  and  process  of  resolution  measures  is  thus  a  necessary  step  to  accompany  the 
existing  prudential  framework  applicable  to  these  entities  and  progress  toward  a  deep, 
single capital market.      

As  mentioned  above,  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. 
By extension, the same threat provides a basis for EU action to address the failure of a 
CCP.  As  in  the  case  of  the  BRRD  (and  SRM),  Article  114  of  the  Treaty  on  the 
Functioning of the European Union provides an appropriate legal basis for corresponding 
initiative for CCPs.  

5  OBJECTIVES 

The general objectives of the initiative for a recovery and resolution framework for CCPs 
in the EU are: 

  Objective 1: safeguard financial stability and confidence in CCPs, ensuring the 
continuity  of  essential  financial  services  and  minimising  loss  of  value  and 
contagion  of  problems  to  clearing  participants  (i.e.  clearing  members  and  their 
clients) and other market participants (such as linked FMIs); 

  Objective  2:  minimise  losses  for  society  as  a  whole  and  in  particular  for 
taxpayers,  while  calling  upon  shareholders  and  clearing  participants  in  CCPs  to 
contribute  to  the  costs  of  recovery  and  resolution  in  a  fair  way,  reducing  moral 
hazard; and 

  Objective 3: strengthen the Single Market for services provided by CCPs, while 
maintaining  a  level  playing  field  (i.e.  comparable  conditions  for  all  players  to 
compete in EU financial markets) and further harmonising the level of protection 
of clearing participants. 

57   E.g.  the  UK  has  enacted  changes  to  enable  CCP  resolution  by  the  Bank  of  England,  see  Box  1  in 

section 3.2 above and: 
http://www.bankofengland.co.uk/financialstability/Documents/fmi/fmisupervision.pdf  
http://www.bankofengland.co.uk/publications/Documents/fmi/fmiap1403.pdf  

58   ”Completing the Single Market in capital,” Speech by Benoît Cœuré, Member of the Executive Board 
ICMA  Capital  Market  Lecture  Series  2014,  Paris,  19  May  2014 

of 
http://www.ecb.europa.eu/press/key/date/2014/html/sp140519_1.en.html  

the  ECB, 

21 

 
 
 
                                                            
 
 
In relation to the problems identified in section 3.3 and in order to achieve the three main 
objectives  above,  the  specific  and  operational  objectives  are  the  following.  All  five  are 
crucial 
these  objectives 
identified  problems  and 
the 
comprehensively and in a mutually supportive fashion. 

in  overcoming 

to  reach 

Overall  

Problems 

Problem drivers 

Operational objectives 

of 

Disorderly 
failure 
CCP, 
spreading 
contagion  and 
risking 
taxpayer  bail 
outs 

Financial 
risk 
concentration  in  CCPs, 
including 
from 
increasing 
interconnections 
all  major 
between 
institutions 
financial 
and  CCP,  which  may 
threaten 
orderly 
functioning  of  financial 
markets  if  a  CCP  were 
to default 

Increase the transparency of 
how  a  CCP  might  fail  and 
losses 
the  allocation  of 
across 
stakeholders. 
its 
Make proportionate ex-ante 
operational, 
(legal, 
structural) 
to 
reduce  the  likely  cost  of 
failure.  

changes 

Preparation and prevention 

Problems 

Problem drivers 

Operational objectives 

Suboptimal 
level 
of 
preparedness 
of supervisors 
and  CCPs  for 
potential 
severe 
situations, 
including 
tackling 
impediments 
to 
action  

effective 

crisis 

CCPs  and  authorities 
unprepared for potential 
crisis 
situations 
affecting CCPs 

effective 
Ensure 
contingency  planning  by 
CCPs  and  authorities  and 
enable 
to 
remove  ex-ante  any  legal, 
structural 
operational  or 
barriers 
recovery  or 
resolution 

authorities 

to 

22 

Specific 
objectives 

Establish  an 
EU  recovery 
and 
resolution 
framework 
that  promotes 
efficient 
markets  and 
risk 
realign 
reward, 
and 
strengthening 
the 
Single 
Market 

Specific 
objectives 

Increase 
preparedness 
of 
relevant 
authorities 
and  CCPs  for 
crisis 
situations 

 
 
 
 
 
 
 
 
 
Early intervention 

Problems 

Problem drivers 

Operational objectives 

Specific 
objectives 

Sub-optimal 
early 
intervention 
arrangements 
for 
supervisors 

all 

CCP 
Empower 
supervisors  with  a  set  of 
common  powers  and  tools 
to 
intervene  at  an  early 
stage  to  abate  the  financial 
distress  affecting  the  CCP 
and  restoring  its  long  term 
viability 

Provide all supervisors with 
a  realistic  triggers  for  early 
intervention powers 

time  period 
solvency 

Shorten 
ensure 
continuity  of  CCPs 
emergency situations 

to 
and 
in 

Supervisors  unable  to 
avert  a  crisis  situation 
from crystallising 

Inconsistent 
early 
powers,  where 
exist 

use 
of 
intervention 
they 

Uncertainties  about  the 
time  required  to  ensure 
solvency  of  the  CCP 
and  continuity  of,  at 
least, 
critical 
its 
functions  in emergency 
situations 

Resolution 

Problems 

Problem drivers 

Operational objectives 

Inefficient 
CCP 
resolution 
process  and 
suboptimal 
outcomes 

Uncertainty for owners, 
and 
creditors 
participants  of  when  a 
CCP  would  be  placed 
into resolution 

in 

Owners,  creditors  and 
treated 
participants 
each 
differently 
jurisdictions  due 
to 
lack  of 
divergent  or 
effective 
resolution 
tools & powers 

Provide  authorities  with 
clear and reliable resolution 
triggers 

Empower 
resolution 
all 
authorities with a minimum 
of 
harmonised 
resolution tools and powers 
CCPs, 
to 
eliminating 
legal 
uncertainties 

resolve 

set 

Improve 
early 
intervention 
arrangements 
for 
supervisors 

Specific 
objectives 

Ensure 
resolution  of 
in  a 
CCPs 
timely 
and 
robust 
manner 
limit 
contagion and 
eliminate 
legal 
uncertainties  

to 

Lack 
of 
responsible 

authorities 
for  CCP 

Ensure that national interest 
resolution  authorities 
of 

Reduce 
market 

23 

 
 
 
 
 
not 

does 
jeopardise 
resolution  of  cross  border 
CCP  or  one  that  offers  its 
services across borders. 

resolution 

Misalignment  between 
responsibility 
national 
of 
and 
authorities 
cross-border  nature  of 
the industry 

Financing and cost/loss allocation 

Problems 

Problem drivers 

Operational objectives 

Taxpayers,  not  owners 
or creditors of the CCP, 
pay  for  the  cost  of  the 
entities failure 

Develop  appropriate  private 
cost/loss 
and 
financing 
allocation  arrangements  for 
CCP resolution 

Divergent 
policies 
financing 
situations 
available) 

national 
concerning 
crisis 
of 
(where 

Develop 
calibrate 
and 
optimal  cost/loss  allocation 
arrangements  for  financing 
CCP resolution across EU 

Conflicting  interests  of 
States 
Member 
concerning financing of 
crisis situations 

Align  national  interest  with 
in 
EU-wide 
financial 
cost/loss 
allocation arrangements 

interest 

and 

Potential  use 
of 
public 
funds in crisis 
to 
situation 
the 
absorb 
losses 
(and 
recapitalise 
the 
failing 
institution),  if 
available. 
National 
systems 
cannot ensure 
an 
optimal 
and even level 
of  protection 
of 
financial 
stability 
across 
Member 
States  

fragmentation 
ensure 
and 
that 
all 
stakeholders 
(owners, 
clearing 
members  and 
clients) 
are 
treated  fairly 
regardless  of 
their location 

Specific 
objectives 

Develop 
appropriate 
cost/loss 
allocation 
arrangements 
for  financing 
CCP 
resolution 
from  private 
sources 
that 
provide 
optimal  and 
level 
even 
protection for 
all  Member 
States (in line 
with 
other 
prudential 
measures and 
national 
insolvency 
rules) 

24 

 
 
 
 
 
6  PRINCIPAL POLICY OPTIONS

59, COMPARISON AND ANALYSIS OF THE IMPACTS 

6.1  Baseline scenario 

Maintaining the status quo would mean retaining the scenario described in the problem 
definition above.  

EU  prudential  requirements  applicable  to  CCPs  do  not  require  the  preparation  of  plans 
for  the  effective  recovery  and/or  resolution  of  CCPs.  Therefore,  despite  the  global 
guidance provided by CPMI/IOSCO on recovery of financial market infrastructures and 
by the FSB on resolution regimes, there is a clear risk that neither CCPs nor authorities 
would  be  adequately  prepared  for  their  potential  failure.60  Therefore,  notwithstanding 
that CCP failure has thus far been a rare occurrence,61 if no EU regime for the recovery 
and resolution of CCPs is in place, either disparate national regimes or normal insolvency 
law would apply to CCPs where their viability and financial strength are compromised, 
through  for  example  the  materialisation  of  risks  laid  out  in  annex  VIII.  As  such  the 
continuation of the critical services provided by CCPs would not be ensured in case of 
extreme events which give rise to large losses for the CCP. Due to the specific features of 
CCPs,  and  their  interconnectedness  with  the  wider  markets,  this  could  lead  to  severe 
systemic disruptions and threaten financial stability. In this respect, it is again necessary 
to take into account that the importance and risk exposure of CCPs will increase in the 
coming  years  due  to  the  implementation  of  the  OTC  derivatives  clearing  obligations. 
Moreover, the distress of a CCP could quickly produce contagion effects via its users to 
other financial market players and to other CCPs with which it is interlinked. 

Furthermore, avoidable failures of CCPs may materialise because the relevant authorities 
lack  comprehensive  means  to  intervene  in  the  operation  of  CCPs  before  terminal 
problems crystallise. As a consequence of the above, if no action at EU level is taken, it 
cannot be excluded that in order to prevent a CCP failure from compromising financial 
stability, taxpayers' money would have to be used to support their operations and cover 
incurred losses. 

6.2  Possible  options  to  increase  preparedness  of  supervisors  and  CCPs  for  crisis 

situations 

These policy options involve how best to ensure that, beyond the requirements of EMIR, 
authorities  and  CCPs  prepare  sufficient  contingency  plans  for  diverse  crises.  Such 
options are in line with the G20 endorsed internal standards of the FSB. 

Policy option 

Description 

1. No policy change 

The baseline scenario applies 

2.Development  and  maintenance  of  CCPs  would  have  to  adopt  recovery  plans 
setting  out  the  recovery  measures  they  would 

59   The  discussion  of  some  secondary  policy  options,  those  considered  less  crucial  and  those  raised  by 
some stakeholders but which are less expedient in view of the main objectives targeted by this impact 
assessment is outlined in annex XII.   

60  See annex III on the international work carried out in this area. 
61   See annex X for examples of CCP (near)-failures 

25 

 
 
 
                                                            
recovery plans by CCPs 

in  extreme  circumstances 

take 
that  could 
threaten  their  viability  and  financial  strength. 
include  adding  an 
This  could 
additional 
the  default 
waterfall under EMIR to cover losses exceeding 
those predefined resources.  

inter  alia 

financing 

layer 

to 

Recovery  plans  would  constitute  a  regularly 
updated  preparatory  tool  against  diverse  and 
foreseeable threats to the overall viability of the 
CCP. They would include the following:  

(i) identification of the critical services;  

(ii)  identification  of  stress  scenarios  that  may 
prevent the CCP from being able to provide its 
critical services as a going concern;  

identification  of 

(iii) 
criteria,  both 
quantitative and qualitative, which could trigger 
the implementation of all or part of the recovery 
plan; and  

the 

(iv)  identification  of  the  recovery  tools  and  the 
to  address  structural  and  operational 
tools 
weaknesses.  

Authorities  would  periodically  assess 
the 
adequacy  of  the  plans.  On  the  basis  of  the 
assessment, authorities may require the entity in 
question to correct deficiencies.  

Authorities  would  have  to  maintain  up-to-date 
resolution  plans  and  that  would  include  the 
identification  of  a  resolution  strategy  for  the 
CCP, taking account of the recovery plan and of 
on-going 
the 
authorities.  

resolvability  assessments  by 

plans 

3.  Development  and  maintenance    of 
resolution 
resolution 
strategies and operational plans by the 
resolution authority (separate from but 
in addition to recovery plans) 

and 

facilitate 

strategies  would 

Resolution 
the 
effective  resolution  of  the  entity  in  a  way  that 
ensures  continuity  of  its  critical  functions  and 
winds its remaining services down in an orderly 
way,  following 
its  critical 
functions  to  another  entity.  Authorities  would 
test the effectiveness of their resolution plans as 
part 
contingency 
comprehensive 
arrangements,  and  any  identified  impediments 

transfer  of 

the 

of 

26 

 
 
 
 
that  are  significant  to  resolvability  should  then 
be removed.  

Option 2: the development of recovery plans will form a key component of a CCP's risk 
management. They will increase the level of due diligence undertaken by CCP as part of 
their  day-to-day  operations  and  will  provide  the  CCPs  with  a  strategy  to  mitigate 
financial  distress  when  it  arises,  either  from  member-defaults  or  other  (non-member) 
defaults. Based on the information and procedures set out in the plans, the CCPs would 
be able to restore their financial health, enabling the continuation notably of their critical 
services, when their viability as a going concern is threatened. The CCP would test the 
robustness  of  the  recovery  plans  against  various  scenarios  (such  as  uncovered  losses 
arising from defaults among CCP clearing members, liquidity shortfalls and inability to 
meet  margin  payments,  capital  inadequacies,  or  a  combination  of  the  scenarios), 
revealing any obstacles to recoverability that would be need to be removed. This could, 
for  example,  mean  the  CCP  establishing  additional  private  contractual  agreements  to 
ensure that recovery measures can be enacted in a timely manner. Through this process 
the  resilience  of  CCPs  would  be  enhanced,  providing  further  confidence  that  CCPs 
would  be  able  to  function  effectively  even  under  extreme  stress.  As  such,  the  recovery 
plans would complement EMIR prudential and other organisational requirements.  

Within the recovery plans, CCPs would identify their critical functions and services, list 
appropriate recovery measures they may undertake and, based on different scenarios of 
stress (complementing  and going  further than the stress test  currently conducted by the 
CCP  and  the  relevant  authorities),  set  criteria  that  would  trigger  the  implementation  of 
such  measures.  However,  no  measure  should  assume  recourse  to  public  funds  or 
extraordinary support from central banks.  

The adequacy of the recovery plans, including the governance procedures, would need to 
be periodically assessed (at least on an annual basis or where there has been a material 
change to the organisational structure of the CCP) by its supervisory authorities, which 
also  need  to  have  the  necessary  powers  to  ensure  that  any  deficiencies  would  be 
corrected.  Where  several  different  authorities  are  concerned,  for  instance  because  a 
CCP’s operations are systemically important to multiple jurisdictions, close cooperation 
between the relevant authorities would be necessary.  

Option  3:  Resolution  plans  (separate  from  but  in  addition  to  recovery  plans)  would 
become  relevant  for  a  failing  CCP,  if  the  recovery  measures  taken  by  the  CCP  were 
unable  to  return  it  to  viability  within  a  reasonable  timeframe  or  the  proposed  recovery 
measures  would  have  likely  jeopardised  financial  stability.  Under  these  circumstances, 
the resolution plans would enable resolution authorities to respond in a rapid and decisive 
manner to the failure or likely failure of a CCP, thereby potentially substantially reducing 
the broader economic and social cost that would arise in the event of a failure. 

Resolution  plans  would  also  signal  to  the  market  that  authorities  will  take  all  the 
available steps to avoid rescuing systemic entities through publicly funded bail-outs, and 
thus counter any perception that a CCP is too big or too complex or too interdependent to 
fail. The withdrawal of any implicit guarantee of state support should, in turn, incentivise 
sound risk management within the CCP and foster stronger market discipline in ensuring 
that risk management of the CCP is sound. 

27 

 
 
 
As part of the resolution planning process, resolution authorities would develop strategies 
based  on  the  information  received  from  the  CCP  (and  its  competent  authorities  if 
different)  on  how  –  in  the  most  effective  but  least  burdensome  way  –  to  preserve  and 
continue the critical functions of the CCP during a resolution, utilising the tools set out in 
the  later  sections  hereunder.  These  strategies  would  then  be  tested  against  various 
scenarios  of  stress,  thereby  identifying  potential  obstacles  to  resolvability,  which  could 
for  instance  relate  to  the  CCP's  structure  or  operations  or  loss  absorption  features.  The 
CCP and the relevant authorities would take steps to reduce the complexity and costliness 
of resolution but these should take account of, amongst other things, the likely effects on 
the soundness of operations, the functioning of markets, the provision of liquidity and the 
incentives  on  affected  parties  such  as  the  direct  (clearing  members)  and  indirect 
participants  (clients)  of  a  CCP.  Increasing  the  resolvability  of  a  CCP  would  reduce 
implicit  state  support  for  those  CCPs  that  are  too  complex  to  fail,  minimising  moral 
hazard and forcing entities to operate more prudently.  

Preferred options and analysis of their overall impacts in meeting the objectives 

The preferred options are options 2 and 3, thereby introducing requirements for CCPs 
to draw up and maintain recovery plans and for the resolution authorities to draw up and 
maintain  resolution  plans  that  set  out  the  resolution  strategy  for  the  CCP,  with  neither 
assuming  recourse  to  public  funds  or  extraordinary  support  from  central  banks.  These 
would complement other  steps in terms of greater supervisory oversight and regulatory 
requirements  (including  stress  tests),  and  would  help  CCPs  and  authorities  in  different 
phases  of  an  evolving  crisis  situation.  Importantly,  they  should  consider  all  types  of 
failure a CCP might encounter (i.e. a member default or other (non-default) events).  

These  plans  are  key  requirements  under  the  FSB  key  attributes  of  effective  resolution 
regimes  for  systemic  institutions  and  form  part  of  the  Principles  for  Financial  Market 
Infrastructures  ('PFMI')62.  The  introduction  of  such  statutory  planning  requirements, 
which  are  also  required  for  banks  as  part  of  the  BRRD,  would  contribute  to  a  level 
European  and  global  playing  field,  generating  benefits  relating  to  strengthened  risk 
management and resilience of CCPs. More broadly, recovery and resolutions plans would 
enable  all  relevant  actors  to  have  a  better  understanding  of,  amongst  other  things,  the 
CCP's critical functions, legal status, risk profile (including the scope and complexity of 
its activities) and interconnectedness. This would enable the CCP and their authorities to 
react  in  a  quicker,  more  decisive  and  more  effective  manner  to  mitigate  any  ensuing 
distress in the CCP or to prevent financial stability repercussions. Shareholders, clearing 
members  and  their  clients  would  also  gain  greater  understanding  of,  for  example,  how 
financial distress in a CCP could affect their ownership rights of the CCP and how any 
uncovered  losses  during  recovery  (and  resolution)  might  be  absorbed  by  their  posted 
assets  and  positions.  In  turn  this  should  incentivise  greater  market  discipline,  reducing 
the  likelihood  that  recovery  (and  resolution)  measures  would  need  to  be  used.  In  a 
situation that threatens a CCP's viability and financial strength, the CCP and authorities 
would  be  better  prepared  to  take  the  necessary  action  to  prevent  its  failure  or  where 
necessary ensure its orderly resolution.  

The development and continuous maintenance of recovery and resolution plans will place 
compliance  and  administrative  burden  on  some  of  the  CCPs.  Additional  costs  could  in 

62   See e.g. paragraph 1.20 of the PFMI, http://www.bis.org/publ/cpss101a.pdf   

28 

 
 
 
                                                            
particular arise where CCPs need to train existing or hire additional staff and/or invest in 
IT or systems to develop recovery plans. The corresponding costs for banks to meet these 
requirements  were  estimated  to  be  in  the  millions  for  the largest  institutions  and in  the 
thousands  for  smaller  entities.63  However,  as  CCPs  are  organisationally  less  complex 
compared  to  banks  the  overall  upfront  costs  for  CCPs  should  be  less.  Again,  as  the 
planning requirements would be proportionate to the structure of the CCP – for instance, 
CCPs with more product lines or complex products would likely require more planning –
the  cost  would  be  proportionate  to  the  complexity  of  the  business  model  of  the  CCP.  
Furthermore, with the overall positive effect for financial stability derived from the plans, 
it can be considered that the overall benefits of developing and maintaining recovery and 
resolution plans for CCPs would outweigh any compliance and administrative costs.   

In a similar vein to the powers provided under the BRRD, in cases where CCPs do not 
take  adequate  steps  themselves  to  remove  the  identified  obstacles  to  resolvability, 
authorities would need statutory powers to improve a CCP's resolvability. This could for 
example include powers to require CCPs to change their business practices, structure or 
organisational procedures. It is not possible to estimate the cost of the requirement in the 
abstract,  as  the  application  of  these  powers  would  be  based  on  a  CCP's  individual 
resolvability  assessment  and  would  vary  on  a  case-by-case  basis.  Any  associated  costs 
should, however, be seen against the benefits of authorities being able to resolve CCPs in 
a way that maintains financial stability and transferring the costs, which otherwise would 
be  borne  by  taxpayers  (through  public  bail-outs  -  should  the  CCP  fail),  to  the  private 
sector. Any possible restructuring of a CCP should have lower overall economic costs in 
comparison to a large bank, as they have less complex structures. Feedback from CCPs 
suggests, at a general level, that they do not oppose the introduction of these powers, but 
they might challenge the case-by-case assessments of any potential shortcomings. In this 
light,  authorities  would  need  to  justify  that  the  exercise  of  any  power  is  in  the  public 
interest and that the fundamental rights of the CCP's shareholders and management have 
not been unduly impinged. For instance, this could mean demonstrating that the measures 
are  proportionate  to  the  systemic  importance  of  the  CCP  and  the  likely  impact  of  the 
CCP failure on financial stability if the obstacles are not removed. CCPs should further 
have the right to appeal.  

Taken  together,  options  2  and  3  would  therefore  represent  clear  benefits  in  terms  of 
meeting the objectives of maintaining financial stability and minimising losses from the 
failure of a CCP for society as a whole. A strengthening of the Single Market would be 
achieved by ensuring a level playing-field as to the applicable requirements and, in case 
of  failure,  of  how  well  the  cooperative  arrangements  foreseen  in  the  plan  worked  in 
practice. In terms of the specific objectives in section 5, the options are assessed to have 
strongly positive impacts as per the table below.  

63   Based  on  their  share  of  total  assets  in  each  Member  State,  EBA  estimates  that  the  largest  individual 
banks could incur on-going annual costs of up to around EUR 5mn, while the figure for the smallest 
banks would be in the thousands. See Table 1, p. 35 
https://www.eba.europa.eu/documents/10180/751477/EBA-CP-2014-
16++%28CP+on+draft+RTS+on+Content+Res++Plans+and+Assessment+of+Resolvability%29.docx.pdf  

29 

 
 
 
 
 
                                                            
Table 1. Comparison of policy options in section 6.2 against effectiveness and efficiency 
criteria 

EFFECTIVENESS 

EFFICIENCY 

Objective 1 

Objective 2 

Objective 3 

Increase 
preparedness 

Effective 
early 
intervention 

and 

Timely 
robust 
resolution 

Objective 
4 

 (cost-
effectiveness) 

Financing 
cost 
and 
allocation 

Objectives 

Policy  

option  

Option 1 

0 

No  policy 
change 

0 

0 

0 

0 

Option 2 

Recovery 
plans 

Option 3 

Resolution 
plans 

++ 

++ 

++ 

++ 

++ 

++ 

++ 

++ 

++ 

++ 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 
0):  ++  strongly  positive;  +  positive;  –  –  strongly  negative;  –  negative;  ≈ 
marginal/neutral; ? uncertain; n.a. not applicable 

6.3  Possible options to improve early intervention arrangements for authorities 

In the event that a CCP is experiencing financial stress, the authorities could be provided 
options for early intervention. Early intervention would occur already in or even before 
the recovery phase of the CCP. These options, which are not dis-similar to those powers 
available  to  authorities  under  the  BRRD  for  banks,  would  focus  on  how  best to  ensure 
that, should a CCP encounter financial distress or breach its regulatory requirements, but 
not  yet  reach  the  point  of  failure,  authorities  could  arrest  the  situation  and  restore  the 
viability of the CCP or take other steps to protect financial stability.  

Policy option 

Description 

1. No policy change 

The baseline scenario applies 

2. Provide supervisors with means for 
enhanced  monitoring  and  effective 
early  intervention  (including  giving 
directions  to  CCP  in  the  recovery 

In  the  case  of  an  unexpected  decrease  of  the 
financial  resources  of  a  CCP,  indications  of 
shortcomings 
risk  management  or 
indications  of  a  potential  emerging  crisis 

its 

in 

30 

 
 
 
 
        
 
to  attempt 

phase) 
to  prevent  an 
irreversible solvency situation or other 
cause of failure from arising. 

situation,  supervisors  would  have  enhanced 
powers, for example, to: 

  obtain greater understanding of the problems 
at stake at an early stage, enabling the timely 
adoption  of  adequate  measures  aimed  at 
reversing  the  decline  in  the  financial  or 
operational health of the CCP.  

  direct  changes  in  management  practices  or 
of other activities of the CCP that may be at 
the origin of problems, including:  

o  require 

the  activation  of 

measures 
recovery plan (if not already done so) 

in  accordance  with 

recovery 
the 

o  directing,  where 

necessary, 

the 
implementation  of  recovery  measures 
(including  the  order  to  abstain  from  the 
implementation  of  certain  measures)  to 
avoid  or  minimise  adverse  effects  on 
financial  stability  that  could  result  from 
the  CCP’s  implementation  of  certain 
measures. 

o  remove  and/or  replace  one  or  more 
members  of  the  senior  management  or 
management body. 

o  request 

changes 

collateral 
arrangements,  margin  requirements,  the 
size or concentration of positions held.  

in 

3. Provide supervisors with powers to 
require  CCPs 
their 
to 
financial  resources  if  they  had  used 
their  capital  to  absorb  losses  during  a 
recovery 

replenish 

Supervisors  would  be  empowered  to  require 
CCPs,  that  have  not  already  done  so,  to 
replenish  their  financial  resources  in  a  timely 
manner.  

Option 2: Should CCPs face financial distress, it would be prudent to equip authorities 
with common minimum powers, enabling them to  fully understand as early as possible 
the potential threats to financial stability arising from this distress which could manifest 
in either a member default or other (non-default) scenario and to ensure that appropriate 
measures  are  taken  to  mitigate  these  threats  as  far  as  possible.  Such  powers  would 
complement  and  harmonise  those  already  in  place  through  a  broad  provision  under 
EMIR.  

31 

 
 
 
 
 
As part of a recovery and resolution regime, supervisors might need to intervene when a 
CCP  faces  financial  distress  to  mitigate  two  types  of  problems.  First,  while 
implementation of recovery plans is the responsibility of the CCP (based on the trigger 
framework of agreed in the recovery plan), the execution of relevant recovery measures 
may  be  ineffective  (for  example,  in  terms  of  timeliness)  or  the  plan  itself  may  be 
inadequately executed. Secondly, the actual recovery measures, such as the CCP-led loss 
allocation tools, might under the prevailing economic circumstances, run counter to the 
overall  objective  of  preserving  financial  stability,  as  the  interests  of  CCPs  might  not 
necessarily be aligned with the wider interests of financial stability. After  all, CCPs are 
private,  profit  making  entities  which  would  not  necessarily  be  concerned  about  the 
impact of its actions on wider financial stability. Thus, given the highly systemic nature 
of  CCPs,  and  the  potential  magnitude  of  losses  that  might  be  allocated  to  their 
stakeholders, the relevant authorities might, for instance, need to give directions on the 
implementation of recovery measures, where warranted by the specific circumstances of 
the case, to avoid or minimise adverse effects on the wider financial system. As such, it is 
important that supervisors are adequately empowered to address these types of problems. 

To this end, CCPs could be obliged by their supervisor to provide detailed information 
and  data  allowing  authorities  to  thoroughly  analyse  the  situation.  Additionally, 
authorities could  also  be empowered  to  intervene in  the management and operations of 
CCPs  considered  at  risk,  where  necessary  in  the  public  interest.  Authorities  could,  for 
instance,  ask  for  changes  in  a  CCP’s  collateral  arrangements,  margin  requirements,  the 
size  or  concentration  of  positions  held,  management  practices  or  other  activities  of  the 
entity  which  might  be  at  the  origin  of  problem(s)  causing  distress  to  the  CCP.  Other 
powers could include the removal and replacement of one or more members of the senior 
management  or  management  body,  the  requirement  to  activate  measures  within  the 
recovery  plan  and  the  power  to  direct  the  implementation  of  recovery  measures 
(including abstaining from the implementation of certain measures) to avoid or minimise 
adverse effects on financial stability.  

Option 3: Where the CCP's financial resources have been used to absorb losses during 
an event of stress, and are not replenished in a timely manner64, the supervisors could be 
empowered to require a more rapid replenishment so as to ensure that the CCP continues 
to operate in a safe and sound manner.  

Preferred options and analysis of their overall impacts in meeting the objectives 

The preferred options are options 2 and 3. Authorities should be provided with powers 
to  stem  where  possible  the  propagation  of  financial  distress  within  a  CCP,  as  well  as 
potential  future  financial  instability.  Authorities  should  be  given  the  opportunity  to  use 
these early intervention powers on their own or in combination in order to mitigate any 
situation as it arises, before a CCP reaches a point at which there is no alternative other 
than to place it into insolvency, or where necessary into resolution.  

The  proposed  powers,  which  are  in  line  with  CPMI-IOSCO  guidance  on  recovery 
arrangements for financial market infrastructure, are already available in some Member 
States  (e.g.  the  UK  and  Italy)  through  the  implementation  of  EMIR  article  22.  By 

64   As  required  by  the  PFMI,  CCPs  should  have  rules  and  procedures  for  replenishment  of  financial 

resources in place, in particular through cash calls or by raising additional equity capital. 

32 

 
 
 
                                                            
empowering  all  relevant  Member  State  authorities  with  the  same  minimum  powers,  it 
ensures that all Member State authorities are able to have greater oversight on the CCP 
and mitigate financial stability risks as the CCP faces financial distress. In practice, this 
would mean providing to competent authorities a common toolbox for early intervention 
purposes.  Such  measures  would  complement  those  already  provided under  existing  EU 
and national law. 

It is generally considered to be preferable to attempt to restore the viability of a distressed 
CCP which is solvent and, on the whole, prudently managed, rather than to restructure it 
or  wind  it  down,  either  through  insolvency  or  resolution.  CCPs  are  rarely  substitutable 
and  are  usually  systemically  important  in  their  respective  markets.  Consequently, 
granting competent authorities powers, amongst others, to issue directions to CCPs in the 
recovery phase that are not taking the necessary action despite existing arrangements in 
the  recovery  plan  would  support  the  objectives  identified  in  section  5.  Furthermore 
enabling  supervisory  intervention  at  this  stage  would  also  be  warranted  where  the 
implementation of loss allocation tools set out in the recovery plan might have significant 
adverse  effects  on  the  CCP's  clearing  members  and  their  clients,  as  well  as  the  wider 
financial markets and put overall financial stability at risk. 

The  2012  Commission  consultation  did  not  cover  potential  early  intervention  tools  at 
length.  Thus  stakeholders’  views  have  been  obtained  through  position  papers  and 
meetings  with  industry  as  well  as  in  the  discussions  with  Member  States  referred  to  in 
section 2.2. On the whole, CCPs and the clients of clearing members do not object to the 
ability of an authority to intervene  in operational  aspects  of the CCP before resolution. 
The  European  Parliament  own-initiative  report  also  signals  support.  Clearing  members 
on the other hand have signalled more reluctance and would prefer for CCP recovery to 
play  out  with  minimal  intervention,  except  in  cases  where  systemic  risks  manifestly 
increase  in  the  process.  Member  States  have  signalled  that  extensive  new  early 
intervention  powers  would  not  be  required,  since  in  some  cases  (as  mentioned  above) 
such  powers  are  already  available  under  national  rules,  but  agree  that  harmonised 
minimum  powers,  e.g.,  to  direct  a  CCP  to  take  (or  abstain  from)  certain  actions  in  the 
recovery  phase,  i.e.  to  activate  or  overrule  any  outstanding  contractual  arrangements, 
have merit.   

In  terms  of  meeting  the  objectives,  the  preferred  options  would  represent  ways  to 
improve on the baseline scenario. It is acknowledged that recapitalisation may (option 3), 
while undoubtedly beneficial, come with a higher overall price tag in terms of efficiency. 
However,  considering  that  this  power  is  generally  already  available  to  supervisors,  its 
harmonisation  as  part  of  early  intervention  powers  is  not  considered  as  a  significant 
source of additional costs across the board.   

It should be noted that in contrast to the BRRD, it has not been proposed that authorities 
are  able  to  appoint  a  temporary  administrator  to  manage  a  CCP  back  to  health  as  this 
would unlikely be necessary or purposeful for CCPs. The circumstances in which action 
by an authority in relation to a CCP would be necessary are likely to be highly specific. 
Replacing  the  management  of  the  CCP  and  changing  its  business  strategy  may  not  be 
expedient given that a CCP's failure is more time critical than a bank's (i.e. a faster burn), 
whereas  targeted  actions  by  authorities  in  accordance  with  (or  divergent  from)  the 
recovery plan would likely suffice. 

33 

 
 
 
Table 2. Comparison of policy options in section 6.3 against effectiveness and efficiency 
criteria 

EFFECTIVENESS 

        Objectives 

Objective 1 

Objective 2 

Increase 
preparednes
s 

Effective 
early 
interventio
n 

EFFICIENC
Y 

 (cost-
effectiveness) 

Objective 
3 

Objective 
4 

Timely 
and 
robust 
resolutio
n 

and 

Financin
g 
cost 
allocation 

policy 

0 

0 

0 

0 

0 

Policy  

option  

Option 1 

No 
change 

Option 2 

Enhanced 
early 
intervention 
tools 

Option 3 

Recapitalisatio
n plans 

++ 

++ 

+ 

++ 

++ 

+ 

++ 

+ 

++ 

+ 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 
0):  ++  strongly  positive;  +  positive;  –  –  strongly  negative;  –  negative;  ≈ 
marginal/neutral; ? uncertain; n.a. not applicable  

6.4  Possible options to ensure resolution of CCPs in a timely and robust manner 

(scope of tools and trigger for using them) 

If the recovery of a CCP cannot be achieved, options should exist for timely resolution. 
The  potential  mechanisms  to  ensure  this  is  set  out  in  this  section  and  the  subsequent 
possible actions to resolve the CCP are set out in sections 6.5 and 6.6. The options in this 
section address the questions of how and when authorities should resolve a failing CCP 
so  as  to  ensure  the  continuity  of  the  entity’s  critical  functions  and  safeguard  overall 
financial  stability,  while  avoiding  recourse  to  public  funds  by  allocating  losses  to  the 
CCP's  owners  and  creditors.  This  section  also  covers  whether  Member  States  can 
introduce  resolution  tools  in  addition  to  those  discussed  sections  6.5  and  6.6  through 
national  law  (i.e.  whether  the  proposed  resolution  toolkit  is  maximum  or  minimum 
harmonising).  

34 

 
 
 
 
 
 
Policy option 

Description 

1. No policy change 

The baseline scenario applies 

2.  Provide  authorities  with  the  ability 
to  place  a  CCP  into  resolution  based 
on 
the  determination  of  whether 
certain conditions have been met (soft 
trigger)  

Resolution action would be possible: 

(i) when a CCP is failing or likely to fail and 

(ii)  alternative  measures  would  not  prevent  the 
failure within a reasonable timeframe and other 
recovery  and  early  intervention  options  have 
failed  or  would  be  insufficient  to  restore  the 
CCP's viability or would otherwise compromise 
overall financial stability; and 

(iii) when resolution is in the public interest.  

3.  Provide  authorities  with  clear 
triggers  as  to  when  to  enter  into 
resolution (hard trigger)  

Resolution  action  would  be  automatic  when 
specific  quantitative  thresholds,  e.g.  specific 
capital limits, have been breached.  

4.  Equip  resolution  authorities  with  a 
set  of  minimum  resolution  tools  and 
powers to resolve CCPs  

Comprehensive,  but  non-exhaustive,  powers 
would enable authorities to take decisive action 
to restructure the operations of the failing CCP, 
separating and securing the functions which are 
critical  for  financial  stability  from  those  which 
are not. (Sections 6.5 and 6.6 set out the options 
for the tools for this option or the one below.) 

5.  Equip  Member  States  with  a 
comprehensive,  exhaustive  tool  kit 
and  set  out  the  order  in  which  the 
tools should be used. 

and 

prescriptive 

Elimination of legal uncertainties around the use 
of  resolution  tools  through  adopting  a  more 
approach. 
mandatory 
Maximum clarity over the application or choice 
of  resolution  actions.  Investors  and  clients  of 
these entities would know in advance the fate of 
their assets in the event of a failure and increase 
their  vigilance  regarding  the  safety  of  their 
assets and of the CCP’s operations.      

Option  2:  A  soft  trigger  would  mean  that  authorities  having  the  discretion  to  initiate 
resolution notably if (i) the CCP is failing or likely to fail; and (ii) alternative measures 
would not prevent the failure within a reasonable timeframe and other recovery and early 
intervention options have failed or would be insufficient to restore the CCP's viability or 
would otherwise compromise overall financial stability; and (iii) resolution would be in 
the public interest. 

To limit threats to financial stability arising from the failure or likely failure of a systemic 
CCP, it is important that, amongst other things, the CCP’s critical functions can continue 

35 

 
 
 
 
without  disturbance.  A  soft  triggering  mechanism  would  provide  authorities  with  the 
power to take quick and decisive action to resolve any systemically important CCP while 
it  is  still  solvent  (but  close  to  insolvency)  –  rather  than  winding-down  the  CCP  under 
normal  insolvency  proceedings  in  a  disorderly  manner,  thus  preventing  disturbance  to 
financial stability. Delaying intervention until the CCP has reached insolvency is likely 
to limit the choice of effective options for resolution, compromise financial stability and 
increase  the  amount  of  losses  that  would  be  incurred  by  stakeholders.  As  such  the 
resolution  framework  should  provide  for  timely  entry  into  resolution  to  ensure  its 
effectiveness.  

In line with the approach applicable to banks, a CCP should generally be considered as 
failing or likely to fail when it is or is likely in the near future to meet one or more of the 
following conditions: be in breach of the requirements for continuing authorisation, when 
its assets are or are likely in the near future to be less than its liabilities, when it is or is 
likely in the near future to be unable to pay its debts as they fall due, or when it requires 
extraordinary public financial support except in carefully prescribed circumstances. Such 
conditionality  also  ensures  that  authorities  do  not  intervene  and  seize  the  operations  of 
the CCP too early. 

Any further uncertainty linked to the subjective nature of soft triggers could be mitigated 
by  authorities  issuing  guidance  to  market  participants  about  their  application  in  crisis 
situations65.  Requiring    authorities  to  examine  if  there  are  no  other  private  sector  or 
supervisory interventions that could be undertaken to return the CCP to viability within a 
reasonable  timeframe  without  otherwise  compromising  financial  stability  affirms  that 
resolution is a 'last resort'. Excessive and unjust interference with the fundamental rights 
of shareholders and creditors is thus avoided. 

Option 3: Hard triggers for resolution, such as a breach of a specific requirement, e.g. 
regarding  capital,  would  bring  transparency  to  the  resolution  framework  by  making  it 
more clearly known ex-ante to all stakeholders when a possible public intervention might 
be prompted. This would remove authorities’ discretion and leave less room for disputes 
about the need for resolution. Affected stakeholders would have less margin to block or 
hinder the resolution process.  

On  the  other  hand,  hard  triggers  have  a  number  of  disadvantages.  For  instance,  they 
could  provide  opportunities  for  regulatory  arbitrage  on  the  part  of  CCPs  if  they  leave 
undue  room  for  entities  to  adjust  or  arbitrage  capital,  accounting  or  other  measures 
around the triggers that will compromise the trigger's  validity. CCPs  may also fail  in  a 
manner that may not meet specific hard conditions, and therefore resolution may not be 
available as an option to achieve an orderly restructuring or wind down of the institution. 
Moreover,  it  is  difficult  to  identify  single  or  compound  indicators  to  detect  possible 
threshold problems or predict future events of financial instability. In the recent crisis, for 
example, the capital ratios of many banks that failed and needed to be rescued by states 
(and  should  therefore  very  likely  have  been  resolved)  were  above  the  regulatory 
minimum. Furthermore, where a situation of crisis is caused by sudden events, relying on 

65   E.g.  Article  32(6)  BRRD  mandates  EBA  to  develop  guidelines  “to  promote  the  convergence  of 
supervisory and resolution practices regarding the interpretation of the different circumstances when an 
institution shall be considered to be failing or likely to fail.” 

36 

 
 
 
                                                            
hard  triggers  could  result  in  undue  time  lags  until  authorities  would  be  empowered  to 
take action. 

Option 4: The introduction of a minimum set of common resolution tools for CCPs in 
all  Member  States  would  significantly  increase  the  chances  of  authorities  to  achieve  a 
successful and effective resolution and hence maintain financial stability. By introducing 
the  same  harmonised  powers  and  specific  resolution  procedures  for  CCPs,  authorities 
could  use  the  available  tools  tailored  for  CCPs,  allowing  for  an  appropriate  balance  of 
priorities to be weighed with regard to affected stakeholders.  

A minimum toolkit would enable Member States to develop further tools to suit national 
specificities. However, the application of these additional tools must be in line with the 
resolution  objectives  and  principles  that  would  be  set  out  as  part  of  this  legislative 
proposal.  This  flexibility  would  also  ensure  that  legal  barriers  for  Member  States  to 
develop ad hoc tools to react to unforeseen crisis situations, should those tools provided 
within the final adopted proposal not be sufficient, are reduced.  

Option  5:  A  maximum  harmonisation  of  the  tools,  which  would  prohibit  Member 
States  for  legislating  for  any  additional  tools,  and  a  clear  path  outlining  which  tools 
would be used and in what order could entail an even clearer system for CCP resolution. 
However, such an approach might risk the effectiveness of a resolution as it would limit 
the ability of authorities to respond in a flexible way to the specific circumstances of an 
evolving crisis situation.  

Furthermore, it appears unlikely that perfectly matched resolution tools and a hierarchy 
of  their  use  could  be  developed  to  address  all  conceivable  crisis  scenarios.  Such  an 
approach would require some form of standardisation of crisis scenarios and of tools and 
procedures  to  be  applied  according  to  the  scenario,  which  does  not  appear  realistic. 
Hence, it is possible that the envisaged resolution measures would not be appropriate to 
deal  with  the  concrete  problems  at  stake,  in  particular  when  it  comes  to  resolving  a 
potentially complex institution in a way that protects financial stability. In an unforeseen 
systemic  crisis  scenario,  prescriptive  resolution  procedures  risk  therefore  not  being 
adequate to enable authorities to maintain the critical functions of a CCP. For example, 
the critical functions might be too technically complex or large to sell to other CCPs in 
the  prevailing  conditions  without  utilising  a  further  tool.  Similarly,  pre-agreed  loss 
absorption  measures  might  not  be  sufficient  to  restore  the  CCP  to  viability  so  as  to 
maintain market and creditor confidence. The resolution authorities might need to apply 
further ad hoc loss absorption measures to suit the prevailing circumstances to ensure the 
effective resolution of the CCP.  

Preferred options and analysis of their overall impacts in meeting the objectives 

The preferred options are options 2 and 4.  

The resolution trigger needs to strike the right balance between being flexible enough to 
enable  authorities  to  resolve  a  CCP  in  a  crisis  and  provide  an  appropriate  degree  of 
predictability for stakeholders. In line with the approach adopted for banks, the preferred 
option  would  be  to  leave  the  decision  to  the  assessment  of  authorities  (soft  trigger). 
However, 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 

37 

 
 
 
financial stability, and most importantly that it would be in the public interest to place the 
institution into resolution, rather than normal winding up or insolvency proceedings. Any 
limitations on the rights of shareholders and creditors, such as CCP's clearing members 
and their clients, should be in accordance with Article 52 of the Charter of Fundamental 
Rights.  In  particular,  interference  with  property  rights  should  not  be  disproportionate. 
Affected  parties  should  not  incur  greater  losses  than  those  which  they  would  have 
incurred  if  the  CCP  had  been  placed  into  insolvency  proceedings.  Importantly,  despite 
the  conditions  for  resolution  being  met,  there  ought  to  be  nothing  to  preclude  the 
resolution authority placing non-critical or non-systemic functions of a CCP in resolution 
into normal insolvency proceedings, if these were deemed to ensure an orderly wind-up 
of these functions.  

This  trigger  mechanism  could  be  backed  by  guidance  from  authorities  to  market 
participants  about  how  they  would  assess  the  triggering  conditions  in  crisis  situations. 
This should provide stakeholders, who sometimes signal a preference for hard triggers on 
grounds of greater predictability, with a high degree of certainty as to when an authority 
may intervene and place a CCP under resolution.   

A  harmonised  but  not  exhaustive  or  prescriptive  resolution  toolkit  that  provides 
authorities  with  the  necessary  discretion  to  take  into  account  the  circumstances  of  a 
potential  crisis  is  the  preferred  option.  In  any  case,  conceivable  paths  of  how  to 
potentially  resolve  an  entity  in  various  scenarios  would  be  laid  out  in  non-binding 
resolution  plans.  Some  Member  States,  in  particular  those  where  clearing  members  are 
established  but  not  where  the  CCPs  themselves  are  established,  have  sometimes 
expressed the view that resolution plans should constitute a quasi-“presumptive path” of 
actions  which  the  authority  would  take  and  which  would  be  effectively  known  in 
advance.  However,  they  acknowledge  that  even  the  best-laid  plans  may  require 
considerable flexibility at the point of resolution.      

In  sum,  the  overall  objectives  (financial  stability,  minimise  losses,  stronger  Single 
Market)  as  well  as  the  more  specific  objectives  (as  outlined  in  the  table  below)  are 
considered to be  better served with some degree of  flexibility in the deployment of the 
available  powers  rather  than  their  use  being    tied  to  specific  numerical  thresholds  or 
predefined scenarios. The same conclusions were drawn for banks under the BRRD. 

38 

 
 
 
 
 
Table  3.  Comparison  of  policy  options  in  section  6.4  against  effectiveness  and  efficiency 
criteria 

EFFECTIVENESS 

EFFICIENCY 

Objective 1 

Objective 2 

Objective 3 

Increase 
preparedness 

Effective 
early 
intervention 

Timely  and 
robust 
resolution 

Objective 
4 

 (cost-
effectiveness) 

Financing 
cost 
and 
allocation 

Objectives 

Policy  

option  

Option 1 

policy 

No 
change 

Option 2 

Soft trigger 

Option 3 

Hard 
trigger 

Option 4 

Choice 
tools 

Option 5 

0 

≈ 

≈ 

+ 

Mandatory 
tools 

++ 

of 

0 

≈ 

≈ 

≈ 

≈ 

0 

++ 

+ 

0 

+ 

+ 

0 

++ 

+ 

++ 

++ 

++ 

+ 

+ 

+ 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 
0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; 
? uncertain; n.a. not applicable 

6.5  Possible options to carry out resolution (first set of concrete resolution tools)  

This section and section 6.6 below set out the powers and tools that resolution authorities 
could  have  to  resolve  a  CCP.  Legislation  setting  out  these  tools    would  improve  legal 
certainty  for  all  stakeholders  as  to  how  they  would  likely  be  impacted  during  the 
resolution  of  a  CCP.  Authorities  should  have  a  variety  of  ways  to  carry  out  resolution, 
depending on the specific circumstances of the crisis in question. The options below set 
out are the generic resolution tools that could be made available to authorities to resolve 

39 

 
 
 
 
        
 
 
any  financial  entity  including  banks  (if  justifiable  and  tailored  as  necessary),  while 
section 6.6 sets out the options for CCP loss and position allocation.   

Alongside the options presented below relating to resolution powers, authorities in cross-
border  cases  will  need  to  cooperate  as  necessary  to  achieve  the  objective  of  efficient 
resolution. While the specific mechanisms for this improved cross-border cooperation are 
not  discussed  separately  as  a  distinct  set  of  options  below,  it  should  be  considered 
implicit  in  all  policy  options  and  notably  those  which  are  preferred  that  the  necessary 
cooperative  and  cross-border  institutional  framework  would  have  to  be  in  place  to 
execute the decisions.  

In the case of CCPs, whose business is by nature to a large extent cross border oriented, 
prudential  regulation  provides  for  a  broad  involvement  of  relevant  authorities  in 
authorising  CCPs  and  in  other  supervisory  tasks  via  colleges.66  The  question  of  which 
authorities  should  be  responsible  for  CCP  resolution  would  need  to  be  consistent  with 
this framework.  

Keeping  powers  at  national  level  to  a  maximum  extent  could  make  decision-making 
easier  and  faster  and  aligned  with  fiscal  responsibilities.  However,  without  the 
involvement  of  authorities  in  other  affected  Member  States,  assessing  the  impact  of 
resolution  measures,  e.g.  on  clearing  members  and  their  clients  based  there,  could  be 
more difficult and there could be a risk of bias serving national interests. Enhanced cross-
border  cooperation  between  authorities,  building  on  existing  arrangements  including 
colleges, while potentially more complex and slower, would allow decisions to be based 
on  a  more  complete  overview  of  the  impacts  of  resolution  measures  in  the  affected 
Member States. 

Policy option 

Description 

1. No policy change 

The baseline scenario applies 

2.  Write  down  equity  in  the  CCP  or 
convert  to  equity  any  unsecured  debt 
of the entity in a manner that respects 
the hierarchy of claims in insolvency 

the 

failure  of 

that  owners  bear  a 
This  would  ensure 
proportionate  amount  of  the  incurred  losses 
associated  with 
the  CCP, 
including, for example, where this goes beyond 
their  contribution  to  the  default  waterfall  in  a 
CCP  and  pursuant 
to  other  contractual 
arrangements.  To  the  extent  unsecured  debt 
exists,  this  would  also  allow  to  write  down  or 
convert (bail-in) the CCP’s unsecured creditors, 
such as bondholders.  

to  dispose  of 
3.  Require  CCPs 
additional  prefunded  resources  for 
loss-absorption  and  recapitalisation, 
either  in  a  harmonised  way  or  on  a 
case-by-case  basis  where  required  by 
the  authorities  to  address  deficiencies 

To address situations where losses would erode 
all 
loss 
the  capital  and  other  prefunded 
absorbing  resources  of  CCPs,  they  could  be 
required 
to  dispose  of  additional  paid-up 
liabilities  issued  to  external  investors  or  raised 
from clearing participants, which could be used 

66 See Article 18 of Regulation (EU) No 648/2012. 

40 

 
 
 
                                                            
relating  to  resolvability  highlighted 
during  the  development  of  resolution 
plans. 

4.  Transfer  of  critical  functions  to  a 
solvent third party or a bridge CCP. 

5. Temporary administration 

6.  Moratorium  on  payments  and 
temporary  stay  on  early  termination 
rights (set-off, close-out netting) 

replenish 

to 
recapitalise the entity upon resolution. 

loss-absorbing 

resources  and 

The  authority  could  have  the  power  to  force  a 
sale of all or some of the CCP's business lines / 
portfolio on commercial terms to a solvent third 
party  purchaser  (which  could  be  a  competing 
company) or to a bridge CCP wholly owned or 
controlled  by  the  authority  to  house  critical 
functions  before  their  onward  sale  to  a  third 
party. This transfer would include the transfer of 
all associated rights and obligations and service-
level agreements. 

take  over 

A  public  authority  would 
the 
management  of  the  entity  with  the  objective  of 
correcting  any  deficient  practices  and  ensuring 
the  provision  of  critical  functions  until  those 
functions  can  be  either  restored  to  viability, 
transferred,  replaced  by  another  provider  or 
wound up in an orderly manner67. 

The  application  of  this  power  would  prevent 
counterparties  from  enforcing  their  claims  or 
exercising  their  contractual  rights  to  terminate 
contracts in relation to the CCP under resolution 
in  a  way  which  could  frustrate  efforts  by  the 
authority  to  accurately  ascertain  its  value  and 
secure its critical functions.  

The scope of the application could be limited to 
payments due to general creditors. The authority 
could also order a suspension of the exercise by 
the  CCP's  participants  and  other  relevant 
counterparties  of  early  termination  rights  and 
set-off rights triggered in relation to the CCP. 

Option 2: The aim of this measure is to ensure alignment of risk and reward. It provides 
the resolution authority with  the power to  cancel  or  write down shares of the CCP and 
other  unsecured  liabilities  to  the  extent  necessary  to  absorb  losses  as  these  debt 
instruments (which form part of the CCP's own resources) would have done if the CCP 
were placed into insolvency. In addition, where compensation is due for the write down 

67   This is different from a policy option of making CCPs state-owned non-profit entities. See annex XII 

for why this option is not retained or considered in detail. 

41 

 
 
 
 
 
                                                            
of  unsecured  liabilities,  the  resolution  authority  could  provide  the  compensation  in  the 
form  of  new  shares  in  the  resolved  CCP,  thus  the  original  holders  of  the  unsecured 
liabilities  would benefit from any upside of the shareholding as  the value of the shares 
increase  over  time.  Through  this  explicit  alignment  of  risk  and  reward,  the  ex-ante 
incentives  for  discipline  and  stricter  risk  management  by  the  CCP  should  be  greater  in 
reaction  to  the  increased  scrutiny  by  the  shareholders  and  creditors  concerned.  With 
regard to unsecured liabilities, however, as pointed out by several stakeholders including 
CCPs, the availability of such debt is typically not very high or is non-existent in the case 
of many CCPs68.   

Option  3:  This,  in  essence,  would  be  a  requirement  economically  similar  to  that 
developed by the FSB notably for the  global systemically important banks to maintain 
adequate  loss  absorbing  capacity,69  though  it  would  be  suitably  adapted  to  CCPs.  This 
could, in principle, be considered in a harmonised way (following the route of the FSB) 
or on a case-by-case basis (based on the outcome of the resolvability assessment of the 
CCP and its ability to absorb losses). On the latter options, the composition and amount 
of loss absorbency would be seen in the light of other measures the CCP would be taking 
to  increase  its  resolvability.  However,  in  either  case,  the  resolution  authority  might 
require  the  CCP  to  have  at  its  disposal  an  adequate  layer  of  debt  or  other  unsecured 
instruments  or  other  prefunded  resources  in  order  to  address  deficiencies  related  to  the 
CCP's  resolvability.  Should  it  subsequently  be  placed  into  resolution,  such  a  layer  of 
resources  may  facilitate  the  resolution  of  a  CCP,  enabling  authorities  to  use  readily 
available  instruments  or  resources  that  have  been  earmarked  for  loss  absorption  and 
recapitalisation purposes.  

In this regard, a CCP could, for instance, be required to issue these instruments notably to 
replenish  its  capital  to  levels  required  by  EMIR,  as  well  as  its  default  waterfall 
contribution  (which  is  sometimes  referred  to  as  'skin-in–the-game').  Alternatively,  the 
new pre-funded resources (which could include unsecured creditors) could be called on 
to bear losses in the first instance immediately after the exhaustion of the EMIR default 
waterfall,  reducing  the  burden  on  clearing  members  and  their  clients  on  whom  losses 
would  otherwise  fall.  A  related  but  distinct  idea  is  that  CCPs  and  clearing  members 
should  set  aside  cash  resources  in  a  recapitalisation  fund,  sized  according  to  globally 
carried out stress tests, to absorb losses and recapitalise the CCP, as well as replenish the 
default waterfall.70    

Compared  to  banks,  due  to  the  smaller  likelihood  of  failure  and  thus  the  smaller 
likelihood  that  the  instruments  would  have  to  bear  the  envisaged  losses,  the  costs  for 
CCPs to issue them should be mitigated. However, for the same reason, the opportunity 
costs  inherent  in  requiring  a  permanent  layer  of  liabilities  or  cash  reserves  able  to 

68   Section 6.6 below deals with how other liabilities of CCPs could be written down. 
69   Principles  on  Loss-absorbing  and  Recapitalisation  Capacity  of  G-SIBs  in  Resolution,  Total  Loss-
http://www.fsb.org/wp-
Sheet 

absorbing  Capacity 
2015) 
content/uploads/TLAC-Principles-and-Term-Sheet-for-publication-final.pdf    

(TLAC)  Term 

(November 

70   JP  Morgan:  "What  is  the  Resolution  Plan  for  CCPs"  (September  2014).  Note  that  other  stakeholders 
including indirect participants have also called for mandatory standardised stress test, see, e.g. ISDA: 
"Principles  for  CCP  Recovery"  (November  2014)  and  “CCP  Default  Management,  Recovery  and 
Continuity:  A  Proposed  Recovery  Framework”  (January  2015)  and  Blackrock:  "Central  Clearing 
Counterparties  and  Too  Big  to  Fail"  (April  2014),  PIMCO:  "Setting  Global  Standards  for  Central 
Clearinghouses" (October 2014). 

42 

 
 
 
                                                            
recapitalise a CCP entity in resolution could nonetheless be considerable. Consequently, 
CCPs  themselves  express  strong  scepticism  to  the  idea.71  They  are  also  concerned  that 
having  CCPs  bear  a  greater  portion  of  the  risk  of  member  default  would  decrease  the 
incentives for adequate risk management of clearing members and clients. It is possible 
that the higher costs would be passed on to clearing members and clients through indirect 
charges; according to CCPs this, in particular if an additional loss absorbency layer were 
to  be  required  in  all  CCPs,  would  result  in  an  unlevelled  playing  field  with  other 
jurisdictions, putting EU CCPs internationally at a competitive disadvantage. CCPs have 
further argued that contagion could spread to other financial actors in a crisis situation if 
the buyers of the unsecured debt needed to be bailed in. Furthermore, higher costs could 
constitute a disincentive for clearing. It is also unclear whether there would be a market 
for new equity/debt instruments issued by CCPs. Last but not least, questions remain as 
to  when  the  additional  resources  would  best  be  called  upon,  i.e.  already  during  the 
recovery phase or only when the CCP is put into resolution.  

On the other hand, some clearing members and clients otherwise potentially exposed to 
losses have argued in favour of such resources to cushion the impact for them (see e.g. 
next section and Annex XI part B).  

Harmonised requirements in this respect would need to be carefully studied, including at 
international level in order to ensure a level playing-field72.  

Option  4:  The  transfer  of  all  or  part  of  the  operations  of  a  CCP  to  a  healthy  market 
player  could  ensure  the  continuity  of  critical  services.  As  confirmed  by  several 
stakeholders, the transfer of certain functions of a CCP to other service providers may not 
be carried out easily and quickly due to the specificities of this sector. Finding a private 
sector purchaser for a CCP may also be more difficult than, for instance, for a bank due 
to the fewer number of CCPs (e.g. especially CCPs that clear OTC derivatives) and the 
different nature of CCPs’ products, assets and liabilities. Even if a substitute provider is 
available, operational constraints such as system incompatibility (e.g. IT infrastructures, 
accounts identification) and legal constraints (e.g. novating contracts with another CCP) 
may  be  an  obstacle  to  effecting  such  a  transfer.  Moreover,  in  some  cases  CCPs  are 
mutually-owned by their members and, for competition reasons it may not be desirable to 
transfer  their  ownership  to  a  single  private  purchaser.  However,  the  development  of 
recovery and resolution plans should overcome most of these obstacles. 

Option 4 and 5: Member States have highlighted as part their preliminary views as part 
of  the  expert  working  groups  that  due  to  the  difficulties  notably  in  transferring  CCPs’ 
critical functions promptly to other market players, the establishment of a  bridge  CCP 
could be a more expedient option. The entity or critical parts thereof could be operated in 

71  See  LCH.Clearnet,  “CCP  Risk  Management,  Recovery  and  Resolution”  http://secure-
area.lchclearnet.com/images/CCP_Risk_Management_Recovery_-_Resolution.pdf  and  CME  Group, 
“Clearing 
Exposures” 
and  Member 
http://www.cmegroup.com/education/files/balancing-ccp-and-member-contributions-with-
exposures.pdf  

Contributions 

Balancing 

CCP 

with 

– 

72   For now, the FSB annex to the Key Attributes does not specifically propose new prefunded resources 
for resolution purposes but work in this direction has been signalled for the future: see the letter of the 
Chairman  of  the  Financial  Stability  Board  to  G20  Finance  Ministers  and  Central  Bank  Governors: 
“Financial  Reforms  –  Finishing  the  Post-Crisis  Agenda  and  Moving  Forward”  (February  2015) 
http://www.financialstabilityboard.org/wp-content/uploads/FSB-Chair-letter-to-G20-February-2015.pdf  

43 

 
 
 
                                                            
a temporary bridge CCP for example at cost-recovery basis, effectively as a utility. This 
tool  would  give  time  for  authorities  to  find  a  private  sector  acquirer.  A  temporary 
administration  by  the  resolution  authority  taking  over  the  management  of  the  failed 
CCP  (or  instructing  its  existing  management)  with  the  objective  of  correcting  any 
deficient  practices  and  ensuring  the  provision  of  its  critical  functions  could  ensure  that 
those  functions  can  be  either  restored  to  viability,  transferred,  replaced  by  another 
provider or wound up in an orderly manner.  

Option 6: A moratorium could primarily be considered on payments to a CCP’s general 
creditors.  A  moratorium  should  not  affect  the  ability,  albeit  that  it  has  been  placed  in 
resolution, to continue fulfilling its payment and delivery obligations due to its clearing 
members or to any linked FMI, as otherwise its critical functions would be jeopardised. 
The exception to this could be a variation margin haircut (see below in section 6.6, option 
5). Industry stakeholders and authorities largely agree.   

A  stay  on  the  exercise  of  early  termination  rights  that  may  otherwise  be  triggered 
upon  entry  of  an  institution  into  resolution  or  in  connection  with  the  use  of  resolution 
powers could also be relevant, to prevent users or counterparties from massively closing 
out or amending contracts, thus hampering the viability and value of the resolved entity 
in  a  way  counter  to  the  objectives  of  resolution.  However,  it  should  be  noted  that, 
provided the substantive  obligations  under the contract continue to  be performed,  entry 
into  resolution  should  not  trigger  statutory  or  contractual  set-off  rights  or  entitle 
counterparties to exercise early termination rights.  

Preferred options and analysis of their overall impacts in meeting the objectives 

Options  2  to  6  presented  above  are  all  preferred.  However,  in  the  absence  of 
international analysis and possibly a common international understanding of whether and 
how  CCPs  should  dispose  of  additional  prefunded  resources  for  loss-absorption  and 
recapitalisation,  detailed  harmonised  proposals  for  forms  and  amounts  of  pre-funded 
resources additional to the EMIR default waterfall under option 3 might be premature at 
this point in time. Suitably calibrated, however, authorities could require CCPs to dispose 
of  additional  prefunded  loss-absorbing  resources  on  a  case-by-case  basis,  if  proven 
necessary as part of resolution planning and resolvability assessments (section 6.2, option 
3  above).  All  of  the  other  above  options  could  be  retained,  thus  providing  resolution 
authorities with a vast array of tools that could flexibly be deployed taking into account 
the  circumstances  of  the  specific  case  and  the  need  to  ensure  a  well-balanced, 
proportional approach.  

Importantly,  when  applying  any  of  the  resolutions  tools  and  exercising  any  of  the 
resolution  powers,  authorities  should  take  all  appropriate  measures  to  ensure  that 
resolution  action  is taken in  accordance  with  the principles set out  within the proposal, 
which,  where  available,  should  be  aligned  with  international  principles.  These  would 
include that the continuity of critical services and functions is ensured, shareholders and 
creditors bear an appropriate share of the losses, the management should in principle be 
replaced, the overall costs of the resolution of the CCP are minimised, and creditors of 
the  same  class  are  treated  in  an  equitable  manner.73  In  particular,  where  affected 

73   See  Financial  Stability  Board,  Key  Attributes  of  Effective  Resolution  Regimes  for  Financial 

Institutions, October 2014, http://www.bis.org/cpmi/publ/d121.pdf   

44 

 
 
 
                                                            
stakeholders  within  the  same  creditor  class  are  treated  differently  in  the  context  of 
resolution action, such distinctions must be justified in the public interest and should be 
neither directly nor indirectly discriminatory, e.g. on the grounds of nationality.  

This is reflected in the table below. Notably the key objectives of financial stability and 
minimised overall losses would clearly be served by achieving the specific objectives of 
timely resolution and private-sector financing and cost allocation, via the availability of 
multiple options to carry out resolution. However, it is acknowledged that the efficiency 
of some of the tools such as transferring the critical functions of CCPs and of requiring 
CCPs to dispose of new loss-absorbing resources at all times may not be optimal.       

Table  4.  Comparison  of  policy  options  in  section  6.5  against  effectiveness  and  efficiency 
criteria 

EFFECTIVENESS 

EFFICIENCY 

Objective 1 

Objective 2 

Increase 
preparedness 

Effective 
early 
intervention 

Objective 
3 

Objective 
4 

 (cost-
effectiveness) 

Timely 
and 
robust 
resolution 

Financing 
cost 
and 
allocation 

Objectives 

Policy  

option  

Option 1 

policy 

0 

No 
change 

0 

0 

0 

0 

Option 2 

Write-down  of 
equity 
and 
debt 

n.a. 

n.a. 

++ 

++ 

+ 

Option 3 

Additional 
loss-
absorbency 

Option 4 

Transfer 
bridge/3rd 
party 

Option 5 

Temporary 

n.a. 

n.a. 

++ 

++ 

+/≈ 

to 

n.a. 

n.a. 

++ 

++ 

n.a. 

n.a. 

++ 

++ 

45 

≈ 

+ 

 
 
 
 
        
 
administration 

Option 6 

Moratorium, 
stay 

n.a. 

n.a. 

+ 

+ 

+ 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 
0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; 
? uncertain; n.a. not applicable  

6.6  Possible  loss  and  position  allocation  tools  (second  set  of  concrete  tools  in 

addition to section 6.5) for resolving a CCP    

The risk concentrated in CCPs and the potential for them to act as a source or conduit of 
financial  contagion  requires  additional  assessment  of  a  second  set  of  different  concrete 
options  specific  for  CCPs  to  allocate  the  costs  linked  to  resolution  and  how  to  achieve 
optimal  and  even  levels  of  treatment  and  protection  of  affected  stakeholders  across 
Member States.  

Policy option 

Description 

1. No policy change 

The baseline scenario applies 

2.  Cash  calls  on  clearing  members  as 
per  any  existing  and  outstanding 
(recovery)  obligations  of  clearing 
members  pursuant 
to  contractual 
arrangements with the CCP 

3. Dedicated resolution authority cash 
calls  ('RA  cash  calls')  on  clearing 
members 

4. Auction or allocation of unmatched 
contracts,  as  per  any  existing  and 
outstanding obligations of members or 
clients 
contractual 
arrangements 

pursuant 

to 

Enforce  existing  and  outstanding  obligations  of 
clearing  members  to  provide  additional  cash 
resources  to the CCP. The amount that could be 
called  by  the  authority  would  be  based  on  the 
CCP's contractual arrangements with it clearing 
members.  This  means  that  this  tool  would  only 
be available if it has not been exhausted prior to 
entry into resolution. 

The 
the 
resolution  authority  would  have 
exclusive  right  to  call  on  clearing  members  for 
further cash to support CCP resolution when the 
CCP's  existing  resources  and  contractually 
agreed  cash  calls  under  the  recovery  plan  are 
exhausted.. 

After a clearing member default, to re-establish 
the  CCP’s  matched  book  of  obligations,  the 
authority  could  require  the  CCP  to  auction  or 
allocate the non-auctioned part of the defaulter's 
portfolio to the remaining clearing members. 

(or  “tear-up”)  of 
5.  Termination 
contracts  in  order  to  return  to  a 
matched book 

Terminating  contracts  of  the  defaulter  that  the 
CCP  cannot  honour  to  re-establish  the  CCP's 
matched  book,  reducing  the  CCPs  obligations 
its  clearing  members.  Termination 
towards 

46 

 
 
 
 
6. Variation margin haircutting 

7. Initial margin haircutting 

8. Use of resolution funds 

could be mandated  for either  all open positions 
in  the  CCP,  all  open  positions  in  a  particular 
product  class,  or  only  the  contracts  needed  to 
offset  the  defaulted  contracts  and/or  targeted 
contract tear-ups to minimise impact on netting 
sets. 

This tool would consist in the pro-rata reduction 
of  the  amounts  due  by  the  CCP  to  its  clearing 
members with positive net positions.  

This  would  consist  of  writing  down  the  initial 
margin  provided  by  non-defaulting  clearing 
members.  

Additional  (last  resort)  funding  to  cover  any 
remaining losses and recapitalisation of the CCP 
could  alternatively  be  covered  from  a  new 
resolution  fund  built  up  from  contributions  by 
CCPs  and  their  members  or,  since  the  vast 
majority of clearing members are banks, by the 
bank  resolution  funds  set  up  under  the  BRRD 
and SRM.  

As described in previous sections and in annex III, the aim of the resolution authority is, 
amongst  other  things,  to  preserve  financial  stability  and  minimise  any  costs  associated 
with  the  failure  of  a  CCP  on  the  taxpayer.  To  meet  this  aim,  the  resolution  authority 
would  need  powers  to  allocate  any  losses  on  the  private  stakeholders  of  the  CCP  (the 
owners,  clearing  members  and  their  clients)  as  far  as  possible,  ensuring  that  risk  and 
reward are aligned, and to re-match the book of the CCP, such that there is a buyer and 
seller for all CCP contracts and the position of the CCP is flat. The policy options 2 to 4 
in section 6.5 contribute to this aim. However, if these tools (should they be adopted as 
part of the legislative proposal) are insufficient to absorb losses and to return the CCP to 
a matched book, additional tools tailored for CCPs would be needed.74 This includes: 

Option  2:  Cash  calls  on  clearing  members,  as  per  any  existing  and  outstanding 
(recovery)  obligations  of  these  clearing  members,  would  also  provide  the  authorities 
with additional cash resources to support resolution. However, the availability of this tool 
depends on whether the CCP has provided for it in the recovery plan75 and on whether or 
not  the  tool  has  already  been  exhausted  in  the  recovery  phase.  Resolution  authorities 
could be empowered to  enforce  any existing and outstanding contractual obligations of 
the clearing members to meet cash calls or make further contributions to a guarantee or 
default fund where they have not been already applied exhaustively by the CCP prior to it 

74   See also annex XI for a simplified numerical analysis of some of loss allocation options by the Bank of 

England. 

75   This should be in line with the provisions introduced by the Capital Requirement Regulation to limit the 
exposure of a bank that is a clearing member to the counterparty credit risk associated with exposures 
to CCPs; see Regulation 575/2013: Recitals (81) to (86); Articles 107, 300-311 and 497; annex II. 
47 

 
 
 
 
                                                            
being placed in resolution. If available, such arrangements would have the advantage of 
avoiding  potential  random  allocations  of  losses  implied  by  some  of  the  other  loss 
allocation  options.  However,  cash  calls  might  potentially  be  pro-cyclical  since  this 
approach involves a (despite contractual agreements not necessarily entirely anticipated) 
call of funds on all non-defaulting members and could be difficult to exercise in relation 
to members located in third countries. Furthermore, cash calls rely on clearing members' 
actively  paying  the  required  funds  in  a  timely  manner;  any  time  lag  in  making  these 
payments may be problematic for the CCP's liquidity situation. This issue is discussed in 
more detail in option 3 below.   

A resolution authority will only be able to apply cash calls to the extent that these are part 
of  the  CCP's  rules  and  have  not  been  exhausted  in  the  recovery  phase76.  At  the  same 
time,  in  resolution,  the  principle  that  no  creditor  should  be  worse  off  as  a  result  of 
resolution  measures  than  in  insolvency  applies.  This  would  imply  a  necessity  for  full 
application of the CCP's rules and procedures for loss allocation. This would also be in 
line  with  the  FSB  standards.  CCPs,  clearing  members  and  clients  all  appear  to  favour 
limited cash calls as part of the CCP's rules to cover some of the losses in the event of 
default  waterfall  resources  being  insufficient,  and  the  power  for  authorities  to  enforce 
outstanding obligations. The clearing members would bear the cost of the cash call. This 
would  likely  be  absorbed  by  the  rest  of  the  clearing  members'  business,  including 
possibly by their clients. 

Option  3:  Dedicated  resolution  authority  cash  calls  ('RA  cash  calls')  on  clearing 
members.  The  resolution  authority  would  have  the  exclusive  right  to  call  on  clearing 
members  for  further  cash  when  the  CCP's  existing  resources  (the  CCP's  'default 
waterfall') and contractually agreed cash calls under recovery plans are exhausted. This 
would  provide  certainty  that  specific  earmarked  resources  would  be  available  in 
resolution  and  address  the  concern  that  available  means  could  be  used  up  entirely  in 
recovery leaving insufficient funds for resolution. The financial resources for resolution 
implied  by  this  additional  cash-call  would  not  be  pre-funded  by  the  clearing  members. 
However,  the  amount  of  cash  to  be  called  in  the  event  of  resolution  could  be  sized  in 
proportion  to  surviving  clearing  members'  stake  in  the  default  fund  and  would  thus  be 
known  upfront,  providing  clearing  members  with  ex-ante  transparency.  Clearing 
members could obtain compensation for the cash called in the form of ownership equity 
in  the  CCP.  This  feature  would  incentivise  the  CCP's  owners  to  have  robust  risk 
management systems and recovery plans, lest they would risk losing their ownership to 
clearing members in resolution.  

Depending  on  the  prevailing  circumstances  at  the  time  of  crisis,  resolution  authorities 
could  also  trigger  this  option  in  the  interest  of  preserving  financial  stability  before  the 
entire CCP's default management practices, as part of their recovery plans, are exhausted. 
Notably,  where  warranted  by  financial  stability  considerations,  this  could  imply 
depriving  CCPs  of  certain  options  to  reduce  their  liabilities  to  their  participants  by 
writing  down  the  value  of  gains  made  by  certain  participants  on  their  market  positions 

76   If the contractual arrangements between a CCP and its members involve uncapped cash calls, clearing 
members could be unable to control their risk as they might face unlimited liabilities towards the CCP 
in  case  of  another  member's  default.  This  could  create  strong  disincentives  to  become  a  clearing 
member  of  a  CCP  and  may  partially  undermine  the  G-20  objective  central  clearing  of  standardised 
OTC-derivatives.  

48 

 
 
 
                                                            
(variation margin haircuts) and to fully tear-up positions (and the contracts that underpin 
them). Instead of the CCP restructuring positions in this way over a potentially undefined 
time-period, the resolution authority cash  call  would thus  rely on further  resources at a 
comparatively defined moment and allow critical clearing services to remain intact (i.e. 
avoid large-scale contract tear-up) and avoid losses from falling on position-holders more 
arbitrarily (i.e. through variation margin gains haircutting).  

As indicated above in the discussion of option 2, there is a concern that cash calls may 
have pro-cyclical effects, as clearing members would be asked to provide liquidity at a 
moment of market distress; this risk should however at least be mitigated by the fact that 
due to the cap there is full ex ante transparency of clearing members' potential exposure. 

As for the enforcement of outstanding "recovery" cash calls, a potential downside also of 
the RA cash call is the execution risk, i.e. clearing members may not pay the cash call. 
This  could,  in  particular,  be  a  complex  issue  if  clearing  members  are  located  in  other 
jurisdictions. However, if the resolution cash calls, just like CCP-administered cash calls, 
were  also  written  into  the  CCP's  rules,  this  would  help  mitigate  this  risk.  Clearing 
members not responding to the cash call in time could be put into default by the CCP and 
their  initial  margin  could  be  taken.  Moreover,  the  fact  that  clearing  members  receive 
equity  in  the  CCP  in  exchange  for  the  cash  they  provide  could  further  mitigate  the 
execution  risk  in  the  case  of  the  RA  cash  call.  The  granting  of  equity  could  be  made 
dependent on clearing members' fulfilment of contractual obligations towards  the CCP, 
including their obligation to meet recovery cash calls where these are part of the agreed 
rules.  This  would  constitute  an  additional  safeguard,  countering  the  risk  that  clearing 
members might refuse to honour recovery cash calls under the CCP's rules, based on the 
expectation that they would receive equity in the CCP in exchange for providing cash in  
resolution, subsequent to a failed recovery.  

It should also be noted that, within the EU, some further enforcement provisions exist in 
the BRRD, which provides that all obligations to financial market infrastructures, CCPs 
included, should continue to be honoured by banks which are themselves in resolution. 
Beyond  the  EU,  the  Key  Attributes  commit  jurisdictions  to  set-up  cooperation 
agreements to enforce each other's resolution actions, although these are not yet in place. 

Finally, the implementation  of the RA cash call, like any other unfunded commitments 
vis-à-vis CCPs, would be subject to the application of CRR requirements on the related 
clearing members in terms of: 

  Risk-based  elements77:  in  the  absence  of  a  specific  treatment  for  unfunded 
contributions or commitments towards qualifying CCPs (i.e. authorized or recognized 
under EMIR78), the treatment of such exposures would fall under the CRR "catch-all" 
provision contained in Article 107(2) and be similar to exposures to institutions.  This 
would  result  in  a  capital  charge  of  minimum  1.6%79.  However,  the  latest  BCBS 
requirements do not specify a treatment for these exposures, meaning that CRR could 
be amended to remove this charge without deviating from BCBS standards80. 

77 Articles 300 to 311 of the CRR contain requirements for institutions' exposures to CCPs. 
78 See EMIR Article 14 or 25, respectively. 
79 Assuming a 100% conversion factor (see CRR Article 11 and Annex 1): 8% x 20% x 100% = 1.6%. 
80 See "Capital requirements for bank exposures to central counterparties", BCBS, April 2014. 

49 

 
 
 
                                                            
  Non  risk-based  elements81:  the  leverage  ratio  provisions  would  impose  a  capital 
charge  on  these  unfunded  commitments  of  minimum  0.3%82.    Note  that  this 
requirement is not cumulative with the aforementioned risk-based charge – the higher 
requirement would apply. 

  Liquidity  elements83:  clearing  members  would  have  to  hold  liquid  assets  in 
application of the liquidity coverage ratio.  Institutions would have to include those 
commitments in their potential stressed outflows with a minimum rate of 40% of the 
size of the commitment. 

Option  4:  Auctioning  or  allocating  the  positions  of  the  defaulting  member(s)  would 
allow the contractual relationships underpinning those positions to continue, and ensure a 
non-defaulting member will be able to honour any obligations pursuant to those contracts 
as  they  fall  due.  The  FSB  stipulates  that  resolution  authorities  should  have  powers  to 
enforce  the  rules  and  procedures  of  a  financial  market  infrastructure,  including  any 
obligations of participants to accept allocations of the positions of a defaulting participant 
(i.e.  forced  allocation).  This  could  be  done  in  a  variety  of  ways  to  avoid  excessive 
impacts on clearing members’ and their clients’ netting arrangements in relation to their 
CCP  positions.  For  example,  positions  could  be  allocated  notably  on  to  those  non-
defaulting  clearing  members  who  have  made  fewer  successful  voluntary  bids  in 
preceding  auctions  during  the  recovery  phase.  Although  stakeholders  in  general  do  not 
contest  that  outstanding  contractual  obligations  could  be  distributed  amongst  the 
remaining  clearing  members  in  resolution  (as  they  would  in  insolvency),  clearing 
members  are  critical  of  the  issue  of  forced  allocation  of  contracts  as  they  claim  that 
meeting the additional payment obligations would place a significant burden on to them.. 
This  tool  will,  however,  only  be  available  to  resolution  authorities  if  it  has  been 
contractually agreed between the CCP and its clearing members (it could form part of the 
recovery plans), and up to any agreed caps. Furthermore, where the positions are those of 
the  defaulting  member's  clients,  the  clients  would  continue  to  honour  the  underlying 
contract  not  the  clearing  member  that  has  been  allocated  the  position.  Nonetheless, 
acquiring clearing members have to hold greater capital to offset the potential liabilities 
arising from the contracts they take on. The costs would likely be passed on to the clients 
but could also be absorbed within the wider business of the clearing member     

Options  5-7:  Loss  allocation  among  the  remaining  clearing  members  and  their  clients, 
beyond  those  agreed  in  the  recovery  plans  and  contractual  obligations,  via  haircuts  on 
their  collateral  placed  with  the  CCP  or  via  the  complete  or  partial  tear-up  of  their 
contracts in relation to the CCP would ensure that users of the CCP bear losses and that 
the  CCP  returns  to  a  matched  book.  Should  the  CCP's  failure  derive  from  a  member 
default,  the  remaining  losses  arising  from  such  a  default,  after  the  exhaustion  of  the 
default waterfall and recovery measures, could be spread among the remaining clearing 
members and their clients,. Such loss allocation could take the form of:  

Option 5: Terminating ('tearing-up') contracts that the CCP can no longer honour in 
relation  to  members,  allowing  the  CCP  to  return  to  a  matched  book  by  reducing  its 

81 See CRR Articles 429 and 430. 
82 Considering the 10% floor for conversion factors under the leverage ratio rules: 3% x 10% = 0.3%. 
83 See CRR Articles 412 and 424 as well as the Commission Delegated Regulation (EU) No 2015/61 of 10 
October  2014  to  supplement  Regulation  (EU)  575/2013  of  the  European  Parliament  and  the  Council 
with regard to the liquidity coverage requirement for credit institutions. 

50 

 
 
 
                                                            
obligations  toward  members  either  in  a  broad  or  targeted  way.  A  broad  tear-up  of 
contracts would be tantamount to closure of the CCP and, unless substitute services were 
readily  available,  should  be  contemplated  as  a  last  resort  as  it  could  have  serious 
implications  for  financial  stability.  To  the  extent  that  the  tear-up  concerns  hedge 
positions of members and clients, those would need to replace the positions as quickly as 
possible,  and  be  burdened  with  the  corresponding  replacement  costs  or  be  exposed  to 
unhedged risks. On the other hand, partial tear-up may enable a more targeted reduction 
of  the  CCP’s  obligations.  While  this  tool  is  available  to  CCPs  as  a  recovery  measure, 
clearing  members  are  concerned  about  the  impact  of  tear-ups  on  their  netting  sets  and 
have a clear preference for other loss allocation tools such as variation margin haircuts. 
On  the  other  hand,  feedback  from  major  clients  active  on  CCPs  indicates  that  in  their 
view,  upon  exhaustion  of  the  CCP’s  default  management  process,  rapid  closure  and 
liquidation  of  all  positions  by  the  resolution  authority,  along  with  the  settlement  of 
resulting net claims between the CCP and clearing members would be preferable to any 
prolonged  period  of  CCP  recovery.  They  see  the  replacement  cost  of  renewing  their 
hedges either with another CCP (provided one exists that clears the products concerned) 
or bilaterally (provided any applicable clearing obligation were suspended) as lower than 
the uncertainty inherent in re-pricing and in undergoing further potential haircuts of their 
positions on the original CCP. 

Option 6: Applying haircuts to variation margins: The resolution authority could use 
the  variation  margins  paid  by  the  clearing  members  with  positions  'out-of-the-money' 
into the CCP by not transferring (all or part of) this sum to the clearing members 'in-the-
money'. The advantage of this approach is that liquidity is already available at the CCP. 
Furthermore  it  does  not  have  pro-cyclical  effects  for  the  members  who  pay.  The 
disadvantage is that it might, depending on the severity of the haircut, have a pro-cyclical 
effect for the clearing members who do not receive the payment of variation margins. In 
addition, the random allocation of losses between the clearing members and their clients 
who  are  ‘in-the-money’  at  a  given  time  could  necessitate  ex-post  adjustments.  The 
European Parliament own-initiative report would imply this tool being only available in 
resolution,  not  recovery,  due  to  these  potential  implications  for  the  clients  of  clearing 
members84. While clearing members favour variation margin haircutting of in-the-money 
positions  as  a  way  to  distribute  losses  widely,  clients  are  concerned  about  the 
disproportionate impact on certain end investors such as pension funds who tend to have 
the greatest net directional positions.  

Option 7: Applying haircuts to initial margins of non-defaulting members: under the 
current EU prudential framework initial margins enjoy a special protection.85 Proponents 
of initial margin haircutting argue that the advantage of such an approach is that it would 
apply  to  resources  already  available  at  the  CCP  which  could  immediately  be  used. 
However,  if  initial  margins  were  used,  they  would  need  to  be  replenished  or  CCP 
members'  positions  would  need  to  be  forcefully  reduced.  If  margins  were  not 
immediately  replenished  following  a  haircut  the  CCP  would  be  under-protected  and, 
depending  on  the  circumstances  (for  example,  if  members  are  unable  to  meet  the 

84   Clients are likely to have more directional positions than clearing members. It is argued that variation 
margin haircutting in recovery could amount to a CCP disproportionately passing on losses due inter 
alia to its own mispricing errors to participants who have no contractual relationship with the CCP.    
85   See Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on 

OTC derivatives, central counterparties and trade repositories, Article 45(4).  

51 

 
 
 
                                                            
replenishment margin call), might have to place further members into default. In the case 
of a forced reduction of positions there would be a risk of fire sales and contagion. CCPs 
have also highlighted that any difference at national level, for instance in the degree to 
which  initial  margin  may  be  protected  in  a  resolution  situation,  may  result  in  a 
competitive  disadvantage  for  some  CCPs  as  it  could  potentially  prompt  clearing 
members  to  move  their  clearing  activities  to  CCPs  in  jurisdictions  offering  more 
protection of margins. 

Option 8: The resolution of a CCP might need to be further financed to cover liabilities 
of the CCP. Liquidity needs could be met through the use of  resolution funds built-up 
ex-ante: this would avoid the pro-cyclical impact in so far as sufficient resources would 
be  available  ex-ante.  However,  to  be  efficient,  they  would  need  to  be  adequately 
calibrated  and  sufficiently  large  to  cover  the  losses  and  funding  needs  that  a  CCP 
resolution  might  entail  (e.g.  the  payment  of  compensation  costs,  replenishment  of  the 
default  fund  and  the  costs  of  operationalizing  a  resolution).  Like  in  the  case  of  the 
additional prefunded resources mooted under  option 3 of section 6.586, the opportunity 
cost of such a fund could be considerable, in particular given  the remote probability of 
default.  Consequently,  none  of  the  stakeholder  groups  support  such  a  resolution  fund. 
CCPs have noted that the concept of mutualisation of losses is already central to the risk 
management framework of individual CCPs through their default fund. In their view, an 
industry-wide  fund  could  make  it  difficult  for  each  CCP  to  manage  their  own  default 
management  and  recovery  regime,  creating  confusion  complexity  and  higher  costs  of 
clearing  and  decreasing  the  incentives  for  CCPs  to  develop  and  maintain  adequate  risk 
management procedures. 

Using  the  resolution  funds  set  up  under  BRRD  or  SRMR  would  not  seem  appropriate. 
These are important bulwarks in the system to ensure successful bank resolution, one of 
the  aims  of  which  is  to  avoid  negative  impacts  on  financial  market  infrastructures. 
Calling upon their available funds in case of possible CCP resolution would require an 
upwards revision of the total target level of the BRRD resolution financing arrangements 
or the Single Resolution Fund (SRF). It could also entail a careful readjustment of banks’ 
contributions to the funds, inter alia depending on them being clearing members in one or 
more  CCPs  and  thereby  potentially  benefitting  from  the  funds’  mutualised  support  in 
case of loss allocation within the context of a CCP resolution.   

Preferred options and analysis of their overall impacts in meeting the objectives 

The preferred options are 2, 3, 4, 5 and 6. One of the main objectives of resolution is 
to ensure that the shareholders and unsecured creditors of a failing institution bear their 
share of the losses arising from the failing institution, thereby minimising any costs being 
borne by the taxpayer. This reduces moral hazard and increases market efficiency. It is 
equally  important  that  resolution  actions  do  not  unintentionally  propagate  financial 
instability  or  cause  disproportionate  disturbance  to  property  rights  and  claims  of  the 
stakeholders of the failing institution or create undue opportunity costs.  

Balancing  the  aim  of  overall  financial  stability  (continuity  of  critical  functions,  value-
preservation),  with  effectiveness  (private  sector  loss  allocation,  including  so  as  to 

86   With  the  difference  that  these  funds  would  be  industry-wide,  akin  to  resolution  funds  for  banks, 

available for all CCPs, rather than internal resources within and for individual CCPs. 

52 

 
 
 
                                                            
minimise overall socio-economic losses) and cost efficiency suggests that a broad range 
of  tools  and  options  should  be  available  such  that  authorities  are  able  to  safeguard 
financial stability regardless of the prevailing economic circumstances. At the same time, 
the optimum choice of tools to address uncovered losses in the CCP exceeding available 
EMIR  default  management  resources  should  not  impose  disproportionate  costs  on  any 
one stakeholder group (i.e. owners, unsecured creditors, clearing members or the clients 
of  clearing  members).  Losses  should  be  distributed  in  a  fair  manner  that  respects 
stakeholders’ status in the hierarchy of creditors of the CCP. This might warrant, during 
resolution, an appropriate mix of tools.  

Against  this  backdrop  resolution  authorities  should  first  have  powers  to  enforce  any 
outstanding  contractual  obligations  towards  the  CCP,  while  ensuring  that  financial 
stability is maintained. This would include enforcing the agreed recovery measures that 
form  part  of  the  CCP's  internal  rules,  such  as  calling  upon  any  unused  and  available 
resources  in  the  default  waterfall  or  making  outstanding  cash  calls,  ensuring  that  the 
going concern capital fully absorbs losses, and imposing losses on clearing members and 
participants pursuant to any un-executed parts of the CCP’s recovery rulebook, including 
forced  allocation  of  contracts  and  outstanding  variation  margin  haircuts  (options  2,  4, 
and 6). Second, resolution authorities should have the exclusive right to call on clearing 
members  for  further  cash  when  the  CCP's  existing  resources  (the  CCP's  'default 
waterfall')  and  contractually  agreed  cash  calls  under  recovery  plans  are  exhausted 
(option 3). Third, in accordance with the creditor hierarchy, (as set out under option 2 
and  3  of  section  6.5),  resolution  authorities  should  be  empowered  to  write  down 
remaining capital (including cancelling or severely diluting any shares) and any further 
pre-funded  resources  that  they  have  been  required  to  hold  based  on  their  case-by-case 
resolvability assessment. 

Failure  to  equip  resolution  authorities  with  appropriate  powers  would  mean  that  their 
statutory  powers  in  resolution  would  not  exceed  those  under  private  contractual 
arrangements, making them dependent on the latter.  In the case CCP-recovery failed, it 
would  be  evident  that  they  would  be  insufficient  during  resolution.  Setting  out  clear 
statutory  powers  would  provide  all  stakeholders  with  greater  certainty  on  how  losses 
could  potentially  be  allocated  on  to  them  should  a  CCP  be  placed  into  resolution. 
Harmonised statutory powers would also contribute to a level playing-field with regard to 
the  treatment  of  all  EU  CCPs,  regardless  of  their  location  with  the  Union,  and  their 
stakeholders, enhancing Single Market integration. Finally, it would ensure consistency 
with the no-creditor-worse-off principle, whereby losses would continue to be allocated 
in accordance with the insolvency creditor hierarchy.  

For  this  reason,  beyond  recourse  to  all  contractually  available  loss  allocation  resources 
and to the right to call on clearing members for further cash, resolution authorities should 
also have the power to further haircut variation margin, as well as non-bankruptcy remote 
initial  margin  in  line  with  the  creditor  hierarchy  (options  6  and  part  of  7).  If  the 
resolution authority is not able to return the CCP to a matched book through continued 
auctions  or  forced  allocation  of  positions  as  prescribed  under  the  internal  rules  of  the 
CCP, the authority should be given powers to terminate ("tear-up") contracts. The tear up 
power could for instance be applied to the contracts of the clearing member(s) in default 
or  to  the  product  line/specific  clearing  service  that  is  facing  financial  distress  or  to  the 
CCP as a whole. The latter option, as discussed previously would be a nuclear option as 
this  would  effectively  completely  close  the  CCP  to  down.  Therefore,  it  is  not  clear 
53 

 
 
 
whether anything but complete wind-up of the clearing service would make sense in such 
cases.  However,  a  complete  tear-up  power  could  for  example  be  needed  if  the  critical 
functions  of  the  CCP  were  already  transferred  to  a  third  party  (using  the  tools  under 
option 4 of section 6.5) and the remaining business needed to be wound down. The use 
of these powers would reduce the overall balance sheet of a CCP and return its book to 
an  overall  position,  returning  confidence  to  the  CCP.  It  is  important  that  resolution 
authorities  exercise  their  powers  in  accordance  to  the  principle  of  proportionality  such 
that losses are only placed on stakeholders to the extent necessary to absorb losses and 
return market confidence in the entity. Appropriate safeguards might be necessary to, for 
example,  protect  netting  sets  and  prevent  cross  default  defaults  from  occurring,  thus 
minimising contagion. This could potentially be achieved by ensuring that the entry for 
the CCP into resolution and any subsequent resolution action is not seen as a contractual 
default event. 

While the remaining tools discussed above could, from the point of view of effectiveness, 
improve on the status quo in terms of achieving greater financial stability, their use could 
also  have  harmful  consequences.  In  this  context,  haircutting  bankruptcy-remote  initial 
margin of non-defaulting members ought not to be possible in resolution (part of option 
7)87. Not only would it contravene the 'no creditor worse off' principle, but it would also 
create  significant  market  uncertainty.    The  establishment  of  a  pre-financed  fund  to 
facilitate a CCP resolution (option 8) is also not a preferred option due to the opportunity 
costs  arising,  in  particular,  from  the  remote  probability  of  a  CCP  default.  It  should  be 
recalled that the probability of CCP failure, in particular due to member-default, should 
be  further  mitigated  through  an  effective  application  of  the  BRRD,  including  the 
resolution  funds  set  up  therein.  Furthermore,  from  a  competitiveness  perspective,  the 
combination of the magnitude of a pre-financed resolution  fund that  would  be required 
and  the  low  probability  of  default,  may  lead  to  CCPs  relocating  to  other  jurisdictions 
which would not establish such a financing requirement.  

Through ensuring that private stakeholders bear the cost of CCP failures rather than the 
taxpayer,  loss  allocation  tools  have  the  added  advantage  of  incentivising  these 
stakeholders,  in  particular  those  with  direct  relationships  (namely  the  shareholders  and 
clearing members), to exert greater discipline on the operations of the CCP. In the case of 
dedicated resolution authority cash calls, incentives to support prudent risk management 
could also be further strengthened for the owners of CCPs as clearing members could be 
compensated with equity in the CCP in exchange for the cash they provide to the CCP, 
thereby diluting or wiping out the original shareholders. Those with indirect relationships 
to the CCP would be more incentivised to shop around regarding which clearing member 
to  engage  with  and  adjust  their  positions  in  relation  to  that  clearing  member.  Clients 
suggest, however, their ability to do so might be limited in some market segments due to 
an absence of alternative providers (e.g. clearing of some OTC derivatives) and that their 
established  relationships  with  clearing  banks  largely  determine  which  CCP  is  used  for 
each contract. Still, it suggests that they should not be excluded from absorbing losses in 
all circumstances either,88 unless the clearing bank can offer some contractual safeguards. 
Regardless,  the  loss  allocation  tools  ought  to  incentivise  all  private  stakeholder  of  the 
CCP to address any financial distress faced by the CCP, as although resolution would be 

87   By contrast, haircutting initial margin which is not bankruptcy remote under national law could remain 

an option. 

88   See annex XI for a simplified analysis of this breakdown of impacts. 

54 

 
 
 
                                                            
more  value  preserving  than  insolvency  proceedings,  a  private  sector  solution  would  be 
even better.  

The above options would expose clearing members and their clients to different degrees 
of  liability  in  case  of  a  CCP  failure,  incentivising  them  to  enhanced  governance  CCP 
arrangements.  For  instance,  cash  calls  (option  2)  and  forced  allocation  (option  4)  in 
accordance  with  the  agreed  contractual  arrangements  under  the  CCP's  internal  rules 
would  be  borne  by  the  non-defaulting  clearing  members  of  the  CCP.    The  clearing 
members would absorb the costs, insofar as they are able to and might pass them on to, 
amongst others, their clients. Dedicated resolution authority cash calls (option 3) would 
also be borne by the non-defaulting clearing members; however, clearing members could 
be  compensated  by  equity  in  the  CCP  in  exchange  for  the  resources  they  provide.  The 
haircutting  of  variation  margin  (option  6)  and  non-bankruptcy  remote  initial  margin 
(option  7),  on  the  other  hand,  would  affect  the  ultimate  counterparty  to  the  contract  – 
either a clearing member, which is for instance hedging a business risk, or a client. Under 
the  tear  up  measure  (option  5),  again  this  would  affect  the  ultimate  counterparty. 
However, as the principle initial margin would be returned to that ultimate counterparty 
(minus  any  due  payment)  the  situation  is  slightly  different.  The  strain  on  that 
counterparty would arise should it not be able to enter into a new financial contract on 
the same terms (or if haircuts of variation margin or initial margin had taken place prior 
to  the  termination  of  the  contract).  Depending  on  the  prevailing  market  conditions,  in 
particular if the CCP failure was caused by members defaulting, it would be unlikely that 
the counterparty would find a contract with similar terms and would therefore likely enter 
into one that is more costly. 

Stakeholder views 

Depending  on  the  tools  used,  stakeholders  would  be  affected  in  different  ways  and 
consequently,  having  regard  to  financial  stability  considerations,  resolution  authorities 
may have preferences for certain options depending on the prevailing economic situation. 
An extensive toolkit of options that will allocate losses amongst CCPs’ owners, clearing 
members and their clients, available both to CCPs at the recovery stage and to authorities 
in  resolution  would  allow  to  take  the  specific  circumstances  of  a  given  crisis  situation 
duly into account.  

It  appears  that  each  stakeholder  group,  while  agreeing  that  the  cost  of  a  CCP  failure 
should not fall on to the taxpayer, prefers tools which place the burden on another group 
of stakeholders. Based on the feedback received,89 CCPs tend to favour limited cash calls 
on  clearing  members,  the  ability  to  haircut  variation  margin  gains  and  to  tear-up  loss-
making  uncovered  positions,  both  temporarily  in  order  to  re-price  them  as  well  as 
permanently,  in  effect  closing  down  a  particular  clearing  service.  A  CCP  forcefully 
allocating  losses  from  such  positions  onto  clearing  members  would  also  secure  its 
continuity  by  way  of  loss  distribution  onto  others.  Conversely,  requiring  CCPs  to 
increase  their  own  (shareholders’)  liability  in  either  recovery  or  resolution  would 
alleviate the burden on clearing members (apart from where clearing members fully own 
the CCP) and their clients. CCPs argue against this, noting that their capital requirements 
under EMIR already adequately address all foreseeable scenarios. They say that requiring 
them  to  issue  more  loss-absorbing  equity  or  debt  against  very  unlikely  tail-risk  events 

89   Mostly in bilateral meetings with Commission staff 
55 

 
 
 
                                                            
would be uneconomical. Clearing members and clients, on the other hand, generally tend 
to  favour such greater “skin-in-the-game”  by the CCP, as  a way to  deflect losses away 
from them.90 

However, among the different loss allocation options, the interests of clearing members 
and  clients  diverge  in  important  ways.91  For  instance,  while  clearing  members  favour 
variation  margin  haircutting  of  in-the-money  positions  down  to  the  beneficial  owner 
(either the clearing member or the client) level as the preferred option in recovery as a 
way to distribute losses widely and mimic how claims would be haircut in insolvency,92 
clients generally prefer this option only in resolution. They say that doing so in recovery 
would  likely  lead  to  disproportionate  impacts  on  certain  end  investors  such  as  pension 
funds  who  tend  to  have  the  greatest  net  directional  positions.  Moreover,  this  could  be 
detrimental  to  the  objective  of  continuity  in  that  imposing  losses  to  clients  could 
encourage  them  to  flee  from  the  CCP  imposing  such  costs,  and  further  weaken  the 
position of that CCP. These end-clients do not have a contractual relationship with CCPs 
and  their  positions,  which  are  mostly  hedges  for  investments  unrelated  to  the 
performance of the CCP, and they as such consider that they should not be called upon to 
bear losses to keep it afloat.93 Clients also argue that only authorities, not CCPs, should 
be  empowered  to  apply  loss  absorption  measures  that  touch  margins,  in  line  with  what 
would  happen  in  insolvency.  However,  due  to  the  systemic  disruption  and  value 
destruction  that  could  arise  from  a  CCP  failure  (which  appropriate  resolution  action 
should  minimise  and  address),  there  is  a  strong  preference  amongst  Member  States, 
CCPs  and  clearing  members  that  the  critical  functions  of  a  CCP  should  be  maintained 
and that every effort should be made to recover a CCP that is facing financial distress. 

Clearing members and their clients are also at odds on the merit of contract tear-ups. The 
feedback from major clients active on CCPs indicates that, upon exhaustion of the CCP’s 
default  management  process,  rapid  closure  and  liquidation  of  all  positions  by  the 
resolution authority, along with the settlement of resulting net claims between the CCP 
and clearing participants would be preferable to any prolonged period of CCP recovery. 
They  see  the  replacement  cost  of  renewing  their  hedges  either  with  another  CCP 
(provided  one  exists  that  clears  the  products  concerned)  or  bilaterally  (provided  any 
applicable clearing obligation were suspended) as lower than the uncertainty inherent in 
re-pricing and in  undergoing further  potential  haircuts  of their  positions on the original 
CCP.  

90  See  e.g.  replies  of  the  Investment  Management  Association  (IMA),  Alternative  Investment 
Management  Association  (AIMA)  to  the  2013  FSB  consultation  on    the  application  of  the  Key 
Attributes 
institutions  
Regimes 
http://www.financialstabilityboard.org/publications/c_131025_1.htm  

Resolution 

non-bank 

Effective 

financial 

of 

to 

91   These  effects  vary  depending  on  the  ownership  structures  of  CCPs.  When  CCPs  are  owned  by  their 
clearing members, these interests may be better aligned (beyond agency issues). However, the dominant 
ownership structures for EU CCPs no longer tend to be this ‘users owned-users governed model. 

92   See  the  position  paper  of  the  International  Swaps  and  Derivatives  Association  (ISDA)  on  “CCP  loss 

allocation at the end of the waterfall”, August 2013 
http://www2.isda.org/attachment/NTc5Nw==/CCP_loss_allocation_waterfall_0807.pdf  

93   See e.g. IMA and AIMA replies to the FSB consultation. In other words, they are not investors in CCPs 
akin to liability-holders which could exert discipline on it and which, by this token, should be bailed-in 
in case of failure. However, clients do signal that compensation in the shape of equal claims against the 
defaulted  clearing  member's  estate  or  the  recovered  CCP's  future  profits  could  potentially  make 
variation margin haircutting in recovery palatable. 

56 

 
 
 
                                                            
Clearing  members  on  the  other  hand  express  some  scepticism  to  positions  being 
restructured in this way by CCPs in recovery on the grounds that this could create large 
market disruptions  and would interfere with  the prudential and accounting  treatment  of 
their derivative and other exposures with the CCP. They say that clarity is important on 
ways to avoid increased capital costs of breaking legally enforceable netting sets in any 
non-voluntary way, which they say would otherwise have to be passed on to their clients. 
Consequently,  they  argue  that  tear-ups  should  only  occur  if  the  default  management 
process, including the voluntary auctioning of positions and variation margin haircutting, 
fails  to  cover  the  losses  and  closure  of  the  product  line  becomes  inevitable.  Clearing 
members think authorities should not interfere with the process unless it is clearly likely 
to aggravate contagion and overall systemic risk.94  

Therefore,  the  views  of  clearing  members  and  clients  differ  on  a  point  of  fundamental 
importance. Unlike clients who do not consider the continuity of positions on the ailing 
CCP to be paramount and who consider that losses akin to those that would have applied 
in case of CCP insolvency can only be applied in resolution at the behest of authorities, 
clearing  members  regard  the  continuity  of  the  CCP  and  of  positions  on  it  as  best  for 
overall  value-preservation  and  prefer  the  insolvency  counterfactual  to  apply  already  in 
recovery.     

Two tools which CCPs, clearing members and clients all favour are limited cash calls to 
cover some losses in the event of default waterfall resources being insufficient, and the 
ability for authorities to impose losses by way of any outstanding contractual obligations 
from the CCP’s default management process and recovery rulebook which haven’t been 
applied  already  upon  the  CCP’s  entry  into  resolution.  Finally,  the  tools  which  have 
received little support from industry stakeholders but have led to mixed views amongst 
Member States are: (i) haircutting of initial margins, due to its availability to cover the 
losses only of the defaulted participant, its bankruptcy-remote status in most jurisdictions 
and the fact that, unless replenished immediately, initial margin haircutting would leave 
the  CCP  unprotected,  and  (ii)  industry-funded  resolution  funds  for  loss  absorption  and 
recapitalisation  upon  exhaustion  of  CCP  default  waterfall  resources,  due  largely  to  the 
associated opportunity costs.   

Loss allocation tools may entail that costs are borne more by some and less by others. As 
shown  in  the  table  below,  while  the  objectives  of  financial  stability  and  minimising 
overall losses through timely resolution and private sector financing would be fully met 
in  terms  of  avoiding  losses  for  taxpayers,  the  private  stakeholders  who  are  called  on 
instead would be impacted in different ways and unintended consequences may result – 
hence  the  uniform  assessment  of  “positive”  under  “efficiency”  for  the  preferred 
options.95  

94   See  the  position  paper  of  the  International  Swaps  and  Derivatives  Association  (ISDA)  on  “CCP  loss 

allocation at the end of the waterfall”, August 2013 
http://www2.isda.org/attachment/NTc5Nw==/CCP_loss_allocation_waterfall_0807.pdf 

95   See annex XI for a more detailed breakdown of the potential impacts.  

57 

 
 
 
 
 
                                                            
Table  5.  Comparison  of  policy  options  in  section  6.6  against  effectiveness  and 
efficiency criteria 

EFFECTIVENESS 

        Objectives 

Objective 1 

Objective 2 

Increase 
preparednes
s 

Effective 
early 
interventio
n 

EFFICIENC
Y 

 (cost-
effectiveness) 

Objective 
3 

Objective 
4 

Timely 
and 
robust 
resolutio
n 

and 

Financin
g 
cost 
allocation 

0 

0 

0 

0 

0 

n.a. 

n.a. 

++ 

++ 

+ 

Policy  

option  

Option 1 

No policy change 

Option 
2 
Enforcement  of 
cash  calls,  as  per 
existing 
and 
outstanding 
(recovery) 
obligations  

3 

+ 

cash 

Option 
Dedicated 
resolution 
authority 
calls  

Option 4 

n.a. 

++ 

++ 

+ 

Auction/allocatio
n  

Option 5 

Tear-up 

Option 6 

Variation  margin 
haircutting 

Option 7 

Initial  margin 
haircutting 

n.a. 

n.a. 

++ 

++ 

n.a. 

n.a. 

++ 

++ 

n.a. 

n.a. 

++ 

++ 

+ 

+ 

+ 

n.a. 

n.a. 

++ 

++ 

? 

58 

 
 
 
 
 
Option8 

Resolution fund 

n.a. 

n.a. 

++ 

++ 

- 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 
0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ 
marginal/neutral; ? uncertain; n.a. not applicable 

7  OVERALL IMPACTS OF THE PACKAGE 

Like for banks, a CCP recovery and resolution framework offers a third option between 
massive public bailout of a failing CCP and disorderly insolvency. The costs arising from 
the failure of a CCP will not disappear but would be reallocated from the state (on an ad 
hoc basis) onto private stakeholders (on a more predictable basis).The framework would 
improve  legal  and  economic  certainty  overall.  While  there  may  be  economic  costs 
associated  with  the  framework,  the  recent  banking  crisis  provides  extensive  empirical 
evidence  that  the  existing  alternatives  of  bailout  (e.g.  Ireland)  and  insolvency  (e.g. 
Lehman) are worse in the long-run. And unlike for banks, the preferred options foreseen 
for  CCPs  do  not  include  those  which  carry  major  upfront  costs,  e.g.  new  prefunded 
buffers  of  loss-absorbing  resources  or  resolution  funds.  Also,  State  Aid  implications 
might  be  considered  depending  on  the  resolution  options  retained  and  how  resolution 
powers would be exercised. 

7.1  Small and medium sized institutions (SMEs) 

The  proposals  aim  at  maintaining  financial  stability  in  the  EU  as  a  whole.  Like  other 
businesses, SMEs will benefit from the increased stability of CCPs and the continuity of 
their key critical functions should a financial crisis occur in the future which would lead 
to their distress or failure. The probability of such a crisis occurring should be reduced 
through the planning, prevention and early intervention measures that would form part of 
the proposals. As a result, the potential for negative knock-on effects of a crisis affecting 
the  financial  sector  –  e.g.  reduced  readiness  and/or  capacity  of  the  banking  sector  to 
provide financing to the real economy, recessions etc. – that tend to heavily impact SMEs 
and their ability to  secure funding would also be  reduced. It should be recalled that, in 
light of the relatively high degree of direct dependence of European SMEs on banks for 
their funding, such negative effects for SMEs would be mitigated first and foremost by 
the  effective  resolution  of  banks,  including  the  continuity  of  their  critical  lending 
functions,  pursuant  to  the  BRRD.  However,  the  present  proposal  is  also  critical  in  this 
respect,  since  it  will  help  to  limit  contagion  and  maintain  overall  financial  stability  in 
times of market stress and may thus prevent the occurrence of bank failures (and the need 
to resolve them) which could be the direct or indirect result of the failure of CCPs. 

However, the  costs associated with increasing the level of resilience to and preparation 
for the failure of a CCP (including the removal of any perceived implicit guarantee) may 
be  passed  on  to  the  ultimate  clients  of  CCPs  who  might  be  SMEs,  and  the  wider 
economy.  Still,  the  benefits  associated  with  better  contingency  planning  by  institutions 
whose failure could cause systemic problems, the reduction of contagion risks as well as 
the removal of any perceived implicit guarantee, facilitating an efficient and competitive 

59 

 
 
 
market, improving the economic environment and the fiscal position of Member States, 
means that any associated cost in net terms is unlikely to be significant.       

7.2  Administrative costs  

Some elements of this proposal could be seen as implying administrative burden such as 
the obligations for CCPs and supervisory/resolution authorities to develop recovery and 
resolution plans. However, recovery and resolution plans are key requirements under the 
FSB  key  attributes  of  effective  resolution  regimes  for  systemic  institutions  as  well  as 
under the Principles for Financial Market Infrastructures ('PFMI').96 CCPs and authorities 
are developing such plans to meet international standards has already been undertaken or 
is on-going.  

Under enhanced supervision, potentially increased reporting obligations of CCPs bearing 
higher risk could also increase administrative burden. However, these obligations would 
be  proportionate  to  the  risks  to  financial  stability  posed  by  the  different  CCPs.  They 
should  also  dovetail  with  on-going  and  complementary  processes  such  as  CCPs’  own 
internal  risk  management  reviews  and  supervisors’  on-going  and  periodic  monitoring 
exercises.  

Increased early intervention and resolution powers granted to authorities will not affect 
administrative costs per se. In many cases early intervention powers already exist under 
national legislation; an EU framework would provide for common minimum powers and 
could  contribute  to  a  more  level  playing  field.  If  authorities  require  CCPs  to  provide 
additional  or  more  frequent  reporting  on  their  activities  in  an  emergency  situation, 
authorities need to examine whether the cost of reporting is in balance with the gravity of 
the situation and its potential negative spill over effects. Likewise, any changes requested 
by authorities into business practices should be proportionate and fully reasoned. During 
'business  as  usual'  times  CCPs  would  not  need  to  provide  additional  information 
compared  to  current  obligations  and  those  mentioned  in  the  preparation  phase  (e.g. 
recovery and resolution plans, where applicable).  

7.3  EU budget 

The  above  policy  options  do  not  have  any  implications  for  the  budget  of  the  European 
Union.  Prevention,  early  intervention  and  resolution  would  be  primarily  managed  by 
national  authorities.  Possible  additional  tasks  might  arise  for  the  European  Supervisory 
Authorities  (ESAs)  in  terms  of  coordination  and  binding  mediation  between  national 
authorities as well as drafting guidelines or technical implementing rules (in line with the 
scope of tasks entrusted to the European Banking Authority under the BRRD). However, 
in view of the far fewer number of CCPs, these tasks should be manageable with ESAs’ 
currently  foreseen  resources,  subject  to  their  final  degree  of  involvement  in  the 
framework.   

7.4  Fundamental rights 

The  preferred  options  have  been  scrutinised  in  order  to  verify  if  the  corresponding 
provisions  are  fully  compatible  with  the  fundamental  rights  of  the  Charter  of 

96   See e.g. paragraph 1.20 of the PFMI, http://www.bis.org/publ/cpss101a.pdf   

60 

 
 
 
                                                            
Fundamental  Rights  and  notably  the  right  to  property  (Article  17)  and  the  right  to  an 
effective  remedy  and  to  a  fair  trial  (Article  47).  In  accordance  with  Article  52  of  the 
Charter, limitations on these rights and freedoms are allowed. However, any limitation on 
the exercise of these rights and freedoms must be provided for by the law and respect the 
essence  of  these  rights  and  freedoms.  Subject  to  the  principle  of  proportionality, 
limitations may be made only if they are necessary and genuinely meet the objectives of 
general interest recognised by the Union or the need to protect the rights and freedoms of 
others.  

Some  CCP  resolution  measures  may  interfere  with  shareholder  rights.  The  power  of  a 
resolution authority to transfer the shares or all or part of the assets of a CCP to another 
entity  interferes  with  the  property  rights  of  shareholders  as  these  transfers  would  be 
affected without the consent of the shareholders. In addition, the authorities would have 
the  power  to  decide  which  liabilities  to  transfer  out  of  a  failing  institution  or  to 
restructure based  upon the  objectives  of  ensuring  the  continuity  of  critical services  and 
avoiding  adverse  effect  on  financial  stability.  These  powers  also  involve  possible 
disruptions to the rights of creditors.  

In  respect of Article  1 of the First Additional  Protocol  to the European Convention for 
the  Protection  of  Human  Rights  and  Fundamental  Freedoms,  the  European  Court  of 
Human  Rights  has  held  that  a  share  in  a  company’s  basic  capital  is  a  property  of  the 
shareholder.  A  share  is  capable  of  being  economically  valued  as  any  other  possession. 
Therefore,  Article  1  of  the  First  Additional  Protocol  protects  CCP  owners’  property 
interests  in  their  shares.  The  Court  therefore  protects  shareholdings  against  deprivation 
and  certain  forms  of  governmental  control  and  interference.  However,  this  right  is  not 
granted without any limitation. The State may (only) deprive shareholders of their shares 
subject to conditions provided by law and to general principles of international law, when 
there  is  a  public  or  general  interest  justifying  the  measures  and  against  the  payment  of 
‘fair’ compensation. 

The  objective  pursued  by  the  measures  in  question  is  the  preservation  of  financial 
stability in the European Union. A pre-requirement for the use of these powers is in fact 
that  the  CCP  cannot  be  wound  up  under  normal  insolvency  proceedings  because  this 
would destabilize the financial system. If the authorities had to seek the shareholders' and 
creditors'  consent  before  intervening,  they  would  not  be  able  to  act  with  the  required 
speed  and  certainty  and  thus  preserve  public  confidence  in  the  financial  system.  The 
measures furthermore reduce the need to use public funds to rescue these institutions and 
avoid their creditors remaining immune from suffering losses in insolvency. 

The Court of Justice has recognised in a number of judgements that the protection of the 
banking and financial system is a general interest pursued by EU law and national laws 
governing  banks  and  financial  institutions  and  that  the  protection  of  this  interest  may 
constitute a justification for restrictions to the fundamental freedoms of the Treaty under 
national  law,  provided  that  the  restrictions  are  proportionate  and  suitable  to  reach  the 
objectives they pursue (see case C 110/84, paragraph 27 and case C 101/94, paragraphs 
10  and  26).  In  another  judgement,  the  Court  has  considered  that  maintaining  the  good 
reputation of the national financial sector may constitute an imperative reason of public 
interest  capable  of  justifying  restrictions  on  the  freedom  to  provide  financial  services 
(Case C-384/93). 

61 

 
 
 
Accordingly,  the  measures  in  question  are  in  conformity  with  an  objective  of  general 
interest  pursued  by  the European  Union.  A  further  safeguard  –similar  to  that  under  the 
Bank Recovery and Resolution Directive – will be that shareholders and creditors do not 
receive less favourable treatment in resolution than they would have received if the entire 
institution had instead entered insolvency under the applicable national law. Resolution 
should on the whole be a value-preserving mechanism in comparison to insolvency.  

As the resolution of CCPs would also involve administrative and judicial procedures, the 
provisions concerning related rights such as due process and having an effective remedy 
against the measures are also relevant (Article 47 of the Charter and Article 1 of the First 
Additional Protocol, and Articles 6 and 13 of the European Convention). 

The  case  law  of  the  European  Court  of  Human  Rights  indicates  that  it  will  give 
Contracting States  wider scope for restricting shareholders’ right to  due process if they 
can  show  that  there  is  an  emergency  situation  and  that  the  crisis  requires  expedited 
procedures. The restriction must not be disproportionate to the task the authorities have 
set themselves.  Articles 6 and 13 of  the European Convention, furthermore, set out the 
shareholder’s  right  to  due  process  and  to  an  "effective  remedy".  An  effective  remedy 
implies  that  national  laws  must  afford  to  the  individual  or  entity  concerned  procedural 
guarantees  allowing  a  reasonable  opportunity  for  presenting  its  case  and  effectively 
challenging  the  measures  interfering  with  the  rights  guaranteed  by  that  provision. 
Shareholders are thus entitled to have their grievance against the restructuring measures 
heard, even if the measures alleged to have violated the European Convention are taken 
by a competent authority and are justified in the public interest. 

7.5  Social impacts  

The  preferred  options  are  expected  to  have  a  positive  social  impact,  consisting  of  the 
following aspects: 

 

 

 

improved level of financial stability – enhanced supervision, more effective early 
intervention  and  CCP  resolution  measures  help  ensure  economic  development 
and jobs will be less at risk; 

increased protection for individuals and SMEs customers – lower probability of 
CCP  failure,  specialised  CCP  resolution  process  helps  maintain  continuity  of 
financial services in both wholesale and retail markets; 

less  stress  for  social  welfare  systems  and  taxpayers  –  effective  recovery  and 
resolution of CCPs will put less burden on the welfare systems and taxpayers (no 
bail-out  policy),  and  it  will  avoid  placing  a  huge  burden  on  current  and  future 
taxpayers like in the latest crisis. 

With  regards  to  jobs  in  CCPs,  restructurings  required  by  resolution  authorities  if  the 
institutions  prove  to  be  too  complex  to  resolve may  affect  employees.  In  certain  cases, 
such  restructurings  may  decrease  the  necessary  labour  force,  but  in  others  they  may 
increase  it.  For  example  if  a  CCP  needs  to  disentangle  certain  operations,  certain 
functions  (e.g.  IT,  marketing  and  administration)  may  need  to  be  reinforced.  Also,  any 
redundancies  could  equally  be  expected  in  case  of  insolvency  of  the  failed  CCP. 

62 

 
 
 
Moreover, this would not compare to the vast anticipated loss of employment as a result 
of a failure of a CCP or economic recession prompted by a resulting financial crisis. 

7.6  Third country impacts  

The EU has taken liberalisation commitments in the domain of financial services in the 
General Agreement on Trade in Services (GATS) and bilateral trade agreements. When 
dealing  with  liberalisation  of  financial  services  one  has  to  draw  the  line  between 
measures  that  primarily  have  the  effect  of  imposing  barriers  to  trade  (and  therefore 
should  be  eliminated)  and  measures  necessary  for  public  policy  objectives  –  such  a 
ensuring  the  stability  of  financial  system.  To  cater  for  the  latter,  the  GATS  (and  the 
bilateral  trade  agreements)  contain(s)  a  “prudential  carve-out”  for  domestic  regulation. 
This  provision  ensures  that  market  liberalisation  would  not  jeopardise  prudential 
regulation and supervision, which ensure the protection of financial stability97. Measures 
aimed  at  orderly  resolution  of  financial  institutions  (preventing  meltdowns  of  the 
financial system) are at the very essence of this policy objective.   

Following its new competence on foreign direct investment granted by the Lisbon Treaty, 
the  EU  has  developed  a  comprehensive  investment  policy,  part  of  which  is  the 
negotiation  of  bilateral  agreements  that  contain  investment  protection  standards.  Those 
are  to  replace  progressively  Member  States  bilateral  treaties.  A  classical  investment 
protection  standard  is  the  obligation  to  compensate  an  expropriation.  Resolution 
procedures, which can end up in reducing or nullifying the value of assets belonging to 
third countries investors, might therefore be interpreted as violating this principle. This is 
however  highly  theoretical,  in  particular  since  resolution  is  only  an  ultimate  option  to 
which one resorts once all others have been exhausted In any event, the need to quantify 
the  possible  compensation-related  liabilities  is  limited  because  of  the  safeguard  that 
resolution should leave no-creditor-worse-off (NCWO) than in insolvency. Furthermore, 
any  residual  risk  would  be  addressed  in  EU  agreements  by  the  above  mentioned 
prudential exception.  

EU Member States are  currently parties to  more than 1400 bilateral investment treaties 
with  third  countries.    As  in  the  case  of  EU  agreements,  the  operation  of  the  NCWO 
safeguard  would  make  compensation-related  liabilities  under  these  agreements  highly 
unlikely.  Any  residual  risk  would  have  to  be  addressed  by  the  Member  States,  which 
have an obligation to ensure that their international agreements conform to their Treaty 
obligations. 

Resolution  and  other  prudential  issues  are  extensively  dealt  with  in  specialised 
international  fora.  This  work  aims  inter  alia  to  ensure  the  harmonised  and  non-
discriminatory  application  of  prudential  norms.  With  respect  to  resolution,  the  relevant 
body is the Financial Stability Board. The scope of the FSB key attributes for effective 
resolution  regimes  includes  any  systemic  financial  institutions,  be  it  banks,  FMIs, 
insurers  and  others  such  as  asset  managers,  the  funds  they  manage,  and  finance 
companies. Bespoke annexes to these key attributes were finalised in October 2014 for 

97   From the GATS financial services annex: “Notwithstanding any other provisions of the Agreement, a 
Member  shall  not  be  prevented  from  taking  measures  for  prudential  reasons,  including  for  the 
protection  of  investors,  depositors,  policy  holders  or  persons  to  whom  a  fiduciary  duty  is  owed  by  a 
financial service supplier, or to ensure the integrity and stability of the financial system”. 

63 

 
 
 
                                                            
FMIs and the largest insurers, while work is only starting on comparable policy measures 
for  asset  managers,  investment  funds  and  finance  companies.  In  response  to  the  recent 
financial crisis, a number of countries have already introduced resolution regimes beyond 
banks98. For example, the US is able to apply the recovery and resolution provisions of 
the  Dodd-Frank  Act  to  any  systemic  non-bank  institution,  including  CCPs,  other  FMIs 
and  insurers,  whose  failure  could  lead  to  broader  systemic  consequences  that  could 
undermine  financial  stability99;  and  due  to  the  broad  definition  of  credit  institutions  in 
Germany the bank resolution regime is also available to CCPs with banking licences.100 

International  commitments  taken  by  the  EU  at  the  G20  will  have  to  be  considered  to 
ensure that the implementation of the proposed policies is not incompatible with the EU's 
obligations.  The  Key  Attributes  will  provide  a  basis  from  which  G20  members  will 
develop recovery and resolution regimes for financial institutions, including CCPs. Since 
financial  services  operate  within  a  global  market,  it  will  be  important  to  monitor 
continually  the  implementation  of  recovery  and  resolution  regimes  in  other  G20 
members, to ensure that the EU is resilient and prepared for the next financial crisis but is 
not, at the same time, placed at a competitive disadvantage (as market participants may 
simply move their business to a jurisdiction that has either weaker rules or none at all). 
Therefore any potential loss of competitiveness or opportunities for regulatory arbitrage 
will  have  to  be  taken  into  account  when  deciding  on  the  best  way  to  implement  the 
desired policy initiatives. Particular attention will also need to be given to countries that 
are not part of the G20, as they are not bound by the Group's commitments. Without a 
clearer idea of what third-country recovery and resolution actions may entail, it is hard to 
judge  how  large  an  impact  the  actions  of  third  country  authorities  might  be  on  the 
competitiveness  of  the  EU  and  the  means  by  which  the  EU  could  address  potential 
disadvantages are unknown.  

Finally,  in  view  of  CCPs’  reach  in  providing  services  internationally  to  third  country 
participants, in line with FSB principles and in accordance with the agreed approach in 
the  BRRD  for  banks,  it  will  be  important  to  develop  procedures  for  recognising  and 
enforcing the resolution proceedings of third-country CCPs that have a legal presence in 
the  Union  or  that  have  assets  and  liabilities  located  in  the  Union  which  need  to  be 
transferred or restructured. It will also be necessary to ensure that third country resolution 
proceedings do not have a destabilising impact in the Union or treat EU stakeholders of 
these  entities  in  an  inequitable  manner  in  comparison  to  the  non-EU  stakeholders. 
Authorities should cooperate and strive for a smooth cross-border process in the event of 
distress to ensure continuity and legal certainty. 

7.7  Environmental impacts  

This proposal has no impacts on the environment. 

98  These  include:  Australia,  Brazil,  Canada,  France,  Germany,  Hong  Kong,  Italy,  Japan,  Korea,  Mexico, 
Netherlands, Russia, Singapore, Spain, Switzerland and Turkey. See FSB thematic review on resolution 
regimes, 
2013  
report, 
http://www.financialstabilityboard.org/publications/r_130411a.pdf   

review 

April 

peer 

99   See annex IV for a description of the US regime. 
100  http://www.bis.org/publ/bcbs200.pdf  

64 

 
 
 
 
                                                            
7.8  Summary of impact on key stakeholder groups of preferred options 

Stakeholder 

CCP 

Policy option  

CCP 
shareholder 

CCP 
employees 

SMEs 

Clearing 
members  of 
CCPs 
(direct 
participants) 

of 

Clients 
clearing 
members 
(indirect 
participants) 

Supervisors/ 
Resolution 
authority 

Taxpayers 

No policy change 

Possible 
disorderly 
failure 

Possible  bail-
the 
out 
in 
event 
of 
distress;  moral 
hazard 

Little change  Uncertainty: 
either 
bail-
out  and  no 
or 
change 
possible 
ad 
hoc 
restructuring 
of  contracts; 
moral hazard 

Uncertainty: 
either 
bail-
out  and  no 
or 
change 
possible 
ad 
hoc 
restructuring 
of contracts 

Possible 
indirect 
economic 
harm 
financial 
instability 

from 

Limited 
to 
powers 
and 
prevent, 
the 
mitigate 
effects 
of, 
disorderly  non-
bank failure 

Possible 
significant 
costs 
bail-out 

from 

Improved 
preparedness 
prevention through: 

and 

(i) Recovery plans 

(ii) Resolution plans 

and 

Better 
more 
comprehensive 
overall 
risk 
management 

Greater 
certainty 
how 
could 
their assets 

of  
distress 
affect 

Possible 
organisational 
restructuring 

Greater 
certainty  of 
how  distress 
could  affect 
their 
positions 

Greater 
certainty  of 
how  distress 
could  affect 
their 
positions 

in 
of 
and 

Indirect 
benefits 
terms 
CCPs’ 
authorities’ 
better 
overall 
preparedness 

65 

Better  idea  of 
and  capacity  to 
overcome 
challenges 
orderly 
recovery 
resolution 

and 

to 

in 
of 
and 

Alleviated 
burden 
terms 
CPPs’ 
authorities’ 
better 
overall 
preparedness 

 
 
 
 
 
 
 
 
 
 
 
 
early 
Improved 
intervention measures 
through: 

(i)  Enhanced  early 
intervention tools 

(ii)  Recapitalisation 
plans 

Possible 
requests 
introduce 
changes 
business 
practices 
management 
amid distress  

to 

to 

or 

Possible 
effects,  e.g.  in 
of 
terms 
of 
dilution 
ownership 
amid 
recapitalisation 
amid distress 

Possible 
organisational 
restructuring 

Possible 
modifications 
to 
the  way 
recovery 
measures 
undertaken  

Possible 
modifications 
to 
the  way 
recovery 
measures 
undertaken 

Possible 
indirect 
benefits 
from averted 
financial 
instability 

in 
of 

Alleviated 
burden 
terms 
lower 
likelihood  of 
bail-out  

Better ability to 
tackle 
problems 
they 
before 
become  critical 
or  if  recovery 
measures 
undertaken  by 
CCPs 
risk 
instability 

66 

 
 
 
Probable 
write-down  of 
assets  as 
in 
insolvency 

Possible 
layoffs 
changes 
contracts 
amid distress 

or 
to 

to 
End 
business 
as 
usual  in  case 
(near) 
of 
failure, 
deep 
restructuring 
with  a  view  to 
restoring  only 
critical 
functions 

of 
Establishment 
resolution  measures 
for CCPs through: 

(i) Soft trigger 

(ii)  Choice  of  tools 
such as: 

− Write-down 

of 

equity and debt 

− Additional 
absorbency 

loss-

− Transfer 

bridge/3rd party 

to 

− Temporary 

administration 

− Moratorium, stay 

Continuation 
of  measures 
undertaken in 
recovery  or 
use 
of 
alternative 
measures  set 
the 
in 
out 
resolution 
plan, 
possibility 
for 
to 
distributed 
differently 

impacts 
be 

with 

Indirect 
benefits 
from averted 
financial 
instability 

Comprehensive 
tools  to  restore 
critical 
functions  and 
avoid  financial 
instability 
or 
widespread 
harm 
economy  

to 

in 
of 

Alleviated 
burden 
terms 
effective 
tools  as  an 
alternative to 
bail-out  

Continuation 
of  measures 
undertaken in 
recovery  or 
use 
of 
alternative 
measures  set 
the 
in 
out 
resolution 
plan, 
possibility 
for 
to 
distributed 
differently  

impacts 
be 

with 

67 

 
 
 
Improved cooperation 
and coordination101 

Lower 
likelihood  of  
ring-fencing or 
other obstacles 
to 
free 
movement  

Greater  clarity 
of how distress 
could 
affect 
their assets and 
certainty 
of 
equivalent 
treatment 

Little change  Greater 

certainty  of 
equivalent 
treatment 
distress 

in 

Greater 
certainty  of 
equivalent 
treatment 
distress 

in 

Indirect 
benefits 
from averted 
financial 
instability 
and 
functioning 
Single 
Market 

better 

Joint 
preparation  for 
distress 
scenarios  and  
consistent 
execution 
intervention 
actions 

of 

in 
of 

Alleviated 
burden 
terms 
lower 
likelihood  of 
ad 
hoc 
national 
measures 
and costs 

101  As noted above, while the objective of improved cross-border cooperation is not discussed separately as a distinct set of options in this impact assessment and it is rather considered 
implicit in all policy options and notably those which are preferred that the necessary cooperative and cross-border institutional framework would have to be designed to execute 
them, the anticipated impacts are summarised in this table. See also annex XII, part 2. 

68 

 
 
 
                                                            
Improved 
of 
a 
through 
allocation measures: 

financing 
resolution 
loss 

− Cash call 

− Auction/allocation  

− Tear-up 

− Variation  margin 

haircutting 

of 
Creditors 
old  entity  bear 
some  
losses; 
can 
creditors 
become 
new 
shareholders 
of 
resolved 
entity  through 
conversion  of 
claims or other 
compensation 
measures 

Probable 
write-down  of 
assets  as 
in 
insolvency 

direct 
No 
losses  placed 
onto 
employees 
via 
the 
measures  but 
possible 
layoffs  amid 
overall 
restructuring   

Continuation 
of  measures 
undertaken in 
recovery  or 
use 
of 
alternative 
measures  set 
the 
in 
out 
resolution 
plan, 
possibility 
for 
to 
distributed 
differently 
and  possible 
wind-down 
of the CCP 

impacts 
be 

with 

Better ability to 
shift  losses  to 
fullest 
the 
onto 
extent 
private 
stakeholders 

of 

Burden 
bail-out 
shifted  onto 
private 
stakeholders. 
Any  public 
money 
clawed  back 
from 
industry  

Indirect 
benefits 
from averted 
instability, 
possible 
lingering 
effects 
access 
finance 
confidence 
takes time to 
return 

for 
to 
if 

Continuation 
of  measures 
undertaken in 
recovery  or 
use 
of 
alternative 
measures  set 
the 
in 
out 
resolution 
plan, 
possibility 
for 
to 
distributed 
differently 
and  possible 
wind-down 
of the CCP 

impacts 
be 

with 

69 

 
 
 
 
 
 
 
 
8.  MONITORING AND EVALUATION  

Failures  of  CCPs  are  rare,  not  easy  to  predict  and,  if  possible,  should  be  avoided. 
Consequently, it is not foreseen that the functioning of resolution for CCP failures can be 
monitored  on  the  basis of  how  real  CCP  failures  will  be regularly  handled.  Rather,  the 
preparation and prevention phase, especially the development of proportionate recovery 
and  resolution  plans  and  the  measures  implemented  by  CCPs  and  authorities  based  on 
these  plans  could  be  monitored  based  on  follow-up  with  relevant  national  authorities. 
Consequently,  these  preparatory  steps  would  constitute  the  most  tangible  medium-term 
monitoring  indicators  for  assessing  whether  the  operational  objectives  (in  section  5 
above) are being met. In the event of distress, other suitable 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 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 
the 
stakeholders.  This  corresponds 
implementation of the Bank Recovery and Resolution Directive, which is being used to 
inform how well the framework is delivering on its intended objectives.     

to  monitoring  work  being  undertaken 

in 

A  targeted  examination  of  the  functioning  of  specific  provisions  as  well  as  a  more 
general review could be carried out within 3-5 years. A more complete monitoring and 
evaluation  strategy  could  also  be  developed  in  this  timeframe,  also  building  on  the 
experience of the functioning of the bank recovery and resolution regime.  

70 

 
 
 
 
ANNEX I – GLOSSARY 

Administration  

Asset-liability 
mismatch  

Under  this  resolution  model,  the  authority  would  appoint  an 
administrator to the failing institution who would restructure and 
wind it up. 
A  change  in  value  from  a  deviation  between  asset  and  liability 
cash flows, prices, or carrying amounts, caused by: 

  a change in actual cash flows (for assets and/or liabilities); 

  a  change  in  the  expectations  on  future  cash  flows  (for 

assets and/or liabilities); 

  accounting inconsistencies. 

Bilateral  collateral 
agreement  

An  agreement  that  defines  the  terms  or  rules  under  which 
collateral  is  posted  or  transferred  between  counterparties  to  an 
OTC derivative contract.  

Business risk  

Central 
counterparty 
(CCP)  
Central  Securities 
Depository (CSD) 

Bridge institution   A  'bridge’  institution  (typically  a  bank)  is  a  temporary  licensed 
institution  created,  and  generally  owned  by  or  on  behalf  of,  the 
national  authority  to  take  over  the  viable  business  of  the  failing 
institution and preserve it as a going concern while the authority 
seeks  to  arrange  a  permanent  resolution,  such  as  to  a  suitable 
private sector purchaser. 
Unexpected  changes  to  the  operating  and  legal  conditions  to 
which  a  financial  institution  could  be  subject  to;  for  instance, 
changes  in  the  economic  and  social  environment,  as  well  as 
changes in business profile and the general business cycle. 
A legal person that interposes itself between the counterparties to 
the contracts traded on one or more financial markets, becoming 
the buyer to every seller and the seller to every buyer.  
An  institution  which  operates  a  system  to  enable  securities 
settlement,  i.e.  the  delivery  of  securities  to  the  buyer  against  the 
delivery of cash to the seller, and which ensures the maintenance 
of securities accounts that record issued securities and changes in 
their ownership.  
The process of establishing positions, including the calculation of 
net obligations, and ensuring that financial instruments,, cash, or 
both,  are  available  to  secure  the  exposures  arising  from  those 
positions.  
An  undertaking  which  participates  in  a  CCP  and  which  is 
responsible for discharging the financial obligations arising from 
that participation. 
Additional  resources  to  be  provided  by  clearing  members  to  the 
CCP.  Cash  calls  can  be  determined  in  different  ways  (a  fixed 
amount  irrespective  of  the  participant's  assets,  proportionate  to 
prefunded default fund contributions, proportionate to the activity 
of the participant at the CCP, etc.) and can be capped. 
An asset or third-party commitment that is used by the collateral 
provider to secure an obligation to the collateral taker. Collateral 
arrangements  may  take  different  legal  forms;  collateral  may  be 
obtained using the method of title transfer or pledge.  
The  propagation  of the effect  of  a  failure  or  financial  distress  of 

Clearing 
member/direct 
participant  
Cash call 

Collateral  

Contagion  

Clearing  

71 

 
 
Counterparty 
credit risk  

CPSS/CPMI 

Credit risk  

Default fund  

an institution in a sequential manner to other institutions, markets 
or  systems,  or  to  other  parts  of  a  financial  group  or  financial 
conglomerate.  
The  risk  that  a  counterparty  will  not  settle  an  obligation  for  full 
value,  either  when  due  or  at  any  time  thereafter.  Credit  risk 
includes pre-settlement risk (replacement cost risk) and settlement 
risk (principal risk).  
Committee  on  Payment  and  Settlement  Systems/Committee  on 
Payment and Market Infrastructures. As of 1 September 2014 the 
Committee  on  Payment  and  Settlement  Systems  has  changed  its 
name to Committee on Payments and Market Infrastructures. 
The risk of a change in value due to actual credit losses deviating 
from expected credit losses due to the failure to meet contractual 
debt obligations.  
Credit risk comprises default and settlement risk. Credit risk can 
arise  on  issuers  of  securities  (in  the  company’s  investment 
portfolio),  debtors  (e.g.  mortgagors),  or  counterparties  (e.g.  on 
derivative contracts, or deposits) and intermediaries, to whom the 
company has an exposure. 
A  fund  composed  of  assets  contributed  by  a  CCP’s  clearing 
members that may be used by the CCP in certain circumstances to 
cover  losses  that  exceed  the  losses  to  be  covered  by  margin 
requirements, resulting from defaults by one or more of the CCP’s 
clearing members.  

Exposure  

Fair value  

Financial group  

Early intervention  Remedial  actions  by  competent  authorities  that  take  place  as  the 
health  of  the  financial  institution  significantly  with  a  view  to 
correcting  problems  within  the  institution  and  safeguarding 
overall financial stability.  
The amount of funds at risk, i.e. the amount that one may lose in 
an investment.  
The amount for which an asset could be exchanged or a liability 
settled, between knowledgeable, willing parties in an arm’s length 
transaction. This is a similar concept to market value, but the fair 
value may be a mark-to-model price if no actual market price for 
asset/liability exists.  
A  group  of  undertakings  deploying  financial  activities,  which 
consists of a parent undertaking,  its subsidiaries, and the entities 
in  which  the  parent  undertaking  or  its  subsidiaries  hold  a 
significant participation.  
A  Board,  established  in  April  2009,  that  coordinates  at  the 
international  level  the  work  of  national  financial  authorities  and 
international standard setting bodies and to develop and promote 
the implementation of effective regulatory, supervisory and other 
financial sector policies in the interest of financial stability. 
A  going  concern  is  a  business  that  functions  for  the  foreseeable 
future. 
A  bad  or  good  institution/bank  is  created  when  authorities 
separate  good  from  bad  assets  by  selling  nonperforming  and 
'toxic' or difficult-to-value assets to a separate asset management 
vehicle  (often  referred to  as  a  'bad  bank').  The  aim  is  to  sanitise 

Good 
institution/bank  – 
Bad 
institution/Bank  

Financial  Stability 
Board (FSB) 

Going concern  

72 

 
 
G-SIFI 

Hedge  

Indirect 
participant/client 
Initial 
haircutting 

margin 

Insolvency 

International 
Organisation 
Securities 
Commissions 
(IOSCO) 

of 

Legal risk  

Leverage  

Margin 
(initial/variation) 

Market discipline  

Market value  

the  balance  sheet  of  the  failing  entity  in  order  to  restore  it  to 
viability or with a view to facilitating a private sector solution.  
Global  systemically  important  financial  institution  (G-SIB  for 
banks,  G-SII  for  insurers,  NBNI  G-SIFI  for  non-bank,  non-
insurers). 
A  position  established  in  one  market  in  an  attempt  to  offset 
exposure to the risk of an equal but opposite obligation or position 
in another market.  
A client institution that clears via a clearing member or a clearing 
member's client. 
Initial  margin  haircutting  consists  in  the  reduction  of  initial 
margin provided by non-defaulting clearing members who would 
have  to replenish it. Under the  current  EU prudential framework 
(Regulation  (EU)  No  648/2012)  initial  margins  enjoy  a  special 
protection. 
The  point  at  which  under  national  bankruptcy  procedures  the 
owner  loses  ownership rights  and/or  the  liability-holders  such  as 
policyholders  are  no  longer  entitled  to  the  orderly  settlement  of 
contracts.  
Established in 1983, is the acknowledged international body that 
brings together the world's securities regulators and is recognized 
as  the  global  standard  setter  for  the  securities  sector.  IOSCO 
develops, implements, and promotes adherence to internationally 
recognized  standards  for  securities  regulation,  and  is  working 
intensively with the G20 and the Financial Stability Board (FSB) 
on the global regulatory reform agenda. 
The possibility that lawsuits, adverse judgements from courts, or 
contracts  that  turn  out  to  be  unenforceable,  disrupt  or  adversely 
affect the operations or condition of an institution 
A  financial  ratio  that  compares  some  form  of  owner's  equity  (or 
capital) to borrowed funds or assets.   
An  asset  (or  third-party  commitment)  that  is  accepted  by  a 
counterparty  to  ensure  performance  on  potential  obligations  to  it 
or cover market movements on unsettled transactions. 
‘Initial  margin’  means  margins  collected  by  the  CCP  to  cover 
potential  future  exposure  to  clearing  members  providing  the 
margin  and,  where  relevant,  interoperable  CCPs  in  the  interval 
between the last margin collection and the liquidation of positions 
following  a  default  of  a  clearing  member  or  of  an  interoperable 
CCP default.  
‘Variation  margin’  means  margins  collected  or  paid  out  to 
reflect current exposures resulting from actual changes in market 
price. 
The  creation  of  disciplining  pressure  through  the  publication  of 
financial information and other information about the institution’s 
activities  to  the  public,  or  only  to  shareholders  and  creditors, 
providing  transparency,  hence  allowing  market  participants  to 
assess key organisational and product information. 
The amount for which an asset could be exchanged or a liability 
settled, between knowledgeable, willing parties in an arm’s length 

73 

 
 
transaction based on observable prices within an active market. 

Multilateral 
netting  

Notional amount  
Novation  

Netting  
Netting set 
Normal  insolvency 
proceedings 

Mark-to-market 
valuation  
Mark-to-model 
valuation  
Matched  book  (for 
CCPs) 

Marking to market   The practice of revaluating open positions in financial instruments 
at current market prices and the calculation of any gains or losses 
that have occurred since the last valuation.  
The  practice  of  valuing  rights  and  obligations,  or  more  broadly 
security and financial instruments, using current market prices. 
The  practice  of  valuing  rights  and  obligations,  or  more  broadly 
security and financial instruments based on modelling.  
CCPs  run  what  is  described  as  a  ‘matched  book’:  any  position 
taken  on  by  one  counterparty  is  always  offset  with  an  opposite 
position taken on with a second counterparty. 
Netting  on  a  multilateral  basis  by  summing  each  participant’s 
bilateral  net  positions  with  the  other  participants  to  arrive  at  a 
multilateral net position. Such netting is often conducted through 
a central counterparty (but it can also be done by other entities). 
In such cases the multilateral net position represents the bilateral 
net position between each participant and the central counterparty.  
The offsetting of positions or obligations by counterparties.  
A group of positions between an institution and a counterparty. 
Collective proceedings under national law which entail the partial 
or  total  divestment  of  a  debtor  and  the  appointment  of  an 
administrator or liquidator 
The reference amount on which a derivative contract is written.  
The  replacement  of  a  contract  between  two  initial counterparties 
to a contract with a new contract or with two contracts in the case 
of CCP clearing.  
The  total  number  of  open  derivative  contracts  on  a  specific 
underlying.  
The  phrase  "over-the-counter"  (or  OTC)  can  be  used  to  refer  to 
stocks  that  trade  via  a  dealer  network  as  opposed  to  on  a 
centralised  exchange.  It  also  refers  to  debt  securities  and  other 
financial  instruments  such  as  derivatives,  which  are  traded 
through a dealer network. 
A derivative contract the execution of which does not take place 
on a regulated market as within the meaning of Article 4(1)(14) of 
Directive 2004/39/EC or on a third-country market considered as 
equivalent to a regulated market in accordance with Article 19(6) 
of Directive 2004/39/EC. 
The  stance  an  investor  takes  vis-à-vis  the  market.  An  investor's 
position is said to be long (short) when she buys (sells) a financial 
instrument.  
The  likelihood  that  a  counterparty  will  not  repay  contractual 
obligations according to the agreement.  
The cumulative pressure on a larger number of institutions to sell 
assets  or  raise  capital  at  the  same  time  and  thereby  potentially 
cause more extreme market movements than would otherwise be 
the case. 
Under this resolution model, and in order to apply the resolution 
tools, resolution authorities would have the power to take control 
of an institution upon a decision that it is failing or likely to fail. 

Probability 
default  
Pro-cyclicality 

OTC derivative 

Open interest  

Receivership  

Position  

OTC 

of 

74 

 
 
Reputational risk  

Resolution  

Scenario analysis  

Upon  taking  control  of  the    institution,  the  resolution  authority 
would  manage  its  property  and  exercise  all  the  powers  of  its 
shareholders  and  its  management,  exercise  the  transfer  powers 
and wind up the residual failed institution. 
Type of business risk. The risk that adverse publicity regarding an 
undertaking’s  business  practices  and  associations,  whether 
accurate or not, will cause a loss of confidence in the integrity of 
the institution. 
Procedures and tools for the restructuring or orderly dissolution of 
ailing  financial  institutions  while  preserving  critical  functions 
which are essential for maintaining financial stability.  
Simulation  of  an  alternative  set  of  parameters  within  a  model  in 
order to establish the impact on the outcome. The following types 
of scenarios analysis can be distinguished, for example, by:  

  Historical scenarios;  
  Hypothetical scenarios;  
  One-off events (e.g. simulation of strategic decisions). 

Segregated account   An  account  used  for  the  segregation  of  a  client's  assets  e.g.  in  a 

Set-off / Netting  

Settlement  

Stress test  

Variation  margin 
haircutting 

CCP.  
An  agreement  between  two  parties  to  balance  one  debt  against 
another or a loss against a gain. 
The  completion  of  a  transaction,  wherein  the  seller  transfers 
securities  or  financial  instruments  to  the  buyer  and  the  buyer 
transfers money to the seller.  
A type of scenario analysis in which the change in parameters are 
considered significant, or even extreme. 
Variation margin haircutting consists in the reduction pro-rata by 
the CCP of the amount that it is due to pay to participants with in-
the-money (net) positions, while continuing to collect in full from 
those participants with out-of-the-money (net) positions. 

75 

 
 
ANNEX II – ROLE AND FUNCTION OF CENTRAL COUNTERPARTIES

102 

Securities  transactions  typically  involve  three  sequential  and  distinct  steps:  (i)  trade 
execution, (ii) clearing and (iii) settlement. Clearing and settlement are both "post-trade" 
activities. 

A  CCP  centralises  counterparty  risk  management.  A  CCP’s  rulebook  defines  legally 
binding obligations and rights over all participants (clearing members and their clients) 
that clear and settle over its infrastructure. It further sets out the procedures when there is 
a (clearing member) default event, as well as other (non-default) events. The customers 
of  a  CCP  are  usually  referred  to  as  participants  or  members  to  reflect  the  rule-based 
nature  of  the  CCP  service  (see  glossary  in  Annex  I  for  the  distinction  between  direct 
participants/clearing members and indirect participants/clearing clients).  

The  CCP  ensures  that  it  can  meet  its  payment  and  delivery  obligations  by  collecting 
sufficient collateral (or “margin” – see glossary in Annex I) from each trading party to be 
used to cover any losses incurred if the collateral-giving party defaults and the CCP had 
to  replace  the  trade  at  the  prevailing  market  price.  The  CCP  calculates  collateral 
requirements  based  on  each  member’s  exposures,  open  obligations  and  the  prevailing 
market conditions. 

A  CCP's  competence  in  risk  management  is  critical  –  users  do  not  want  suddenly  to 
discover they do not have the protection they thought they had. If insolvent, a CCP could 
no longer honour its guarantee on trades that have not yet settled. All CCPs have some 
form of loss sharing among its members (often via a central guarantee or default fund) as 
required under EMIR, which would be invoked if a member default results in losses that 
exceed the collateral collected from the defaulter.  

Exposure to loss sharing amongst the clearing members highlights the importance of user 
governance. As central risk manager, a CCP should inform and consult with members on 
matters  that  substantively  affect  the  risks  in  the  system.  As  potential  loss-sharers,  the 
members need to have influence over how risk mutualisation is achieved and what risk 
levels are acceptable. Members should pay attention to the level of risk the CCP is taking 
and what influence they have as paying customers over these decisions. 

In  addition,  as  a  critical  market  infrastructure,  a  CCP  should  have  robust  systems  and 
processes  to  manage  and  mitigate  against  counterparty  risk,  a  good  track  record  in 
delivering service enhancements on time and without flaws, and have scalable capacity to 
handle surges in volumes. As a service provider, it should be flexible and responsive to 
customer needs, but should do so without compromising safety. 

Value for money and pricing are also key considerations. Some participants choose CCPs 
primarily  on  visible  costs,  including  the  level  of  clearing  fees  and  the  amount  of 
collateral  required.  Invisible  costs  include  penalty  fees  on  settlement  fails  and  spread 
retained by the CCP on cash collateral. 

102  The  descriptions  regarding  CCPs  in  annexes  II,  VII,  and  VIII  rely  considerably  on  Pirrong,  C.,  “The 
Economics of Central Clearing: Theory and Practice”, ISDA Discussion Papers Series No.1, May 2011. 

76 

 
 
                                                            
ANNEX  III  –  INTERNATIONAL  WORK  ON  CCPS  (AND  OTHER  FINANCIAL  MARKET 
INFRASTRUCTURES) (CPSS/CPMI-IOSCO AND FSB) 

I. Background 

In  April  2012,  the  Committee  on  Payments  and  Market  Infrastructures  (CPMI)  and 
Settlement  Systems  (CPSS)  and  the  Technical  Committee  of  the  International 
Organization of Securities Commissions (IOSCO) published the Principles for Financial 
Markets Infrastructures (hereinafter "PFMIs"). According to the PFMIs, all systemically 
important FMIs should have comprehensive and effective recovery plans. 

Furthermore,  in  July  2012  the  CPSS  and  IOSCO  published  its  Consultative  Report  on 
Recovery  and  Resolution  of  Financial  Market  Infrastructures  (hereinafter  "the 
Consultative  Report"),  in  which  the  need  for  CCPs  to  have  effective  plans  to  recover 
from  financial  stresses  and  the  need  of  jurisdictions  to  have  effective  powers  for  the 
resolution of CCPs when recovery is no longer feasible was confirmed. According to the 
Consultative  Report,  "these  preventive  and  recovery  measures  include  plans  for 
allocating  uncovered  credit  losses  and  liquidity  shortfalls,  as  well  as  maintain  viable 
plans for restoring an FMI's ability to operate as a going concern or to wind down its 
operations in an orderly manner". 

In  August  2013,  CPSS  and  IOSCO  published  a  further  consultative  report  with 
guidelines on the Recovery of FMIs, while the Financial Stability Board (FSB) published 
a consultative document on the Application of the Key Attributes of Effective Resolution 
Regimes  to  Non-Bank  Financial  Institutions.  Final  versions  of  these  were  published  in 
October  2014.  While  they  covered  FMIs  more  broadly,  the  summary  below  refers 
primarily to CCPs, in line with the focus of this impact assessment.   

II. Recovery 

Recovery plan 

In  the  CPSS-IOSCO  report,  "recovery"  concerns  the  ability  and  actions  of  a  CCP, 
consistent  with  its  rules,  procedures,  and  other  ex-ante  contractual  arrangements,  to 
address any uncovered loss, liquidity shortfall or capital inadequacy including actions to 
replenish  any  depleted  pre-funded  financial  resources,  liquidity  arrangements  or  severe 
business  and  operational  problems,  as  necessary  to  maintain  the  CCP's  viability  as  a 
going concern so that it can continue to provide its critical services without requiring the 
use of resolution powers by authorities and without the use of taxpayers' money.  

Recovery planning therefore concerns those aspects of risk management and contingency 
planning which address the extreme circumstances that could threaten the CCP's viability 
and financial strength. Those "extreme circumstances" should be identified in advance, to 
the  extent  possible,  by  the  CCP.  Therefore,  the  recovery  plan  would  allow  the  CCP  to 
recover and continue to provide its critical services when its viability is threatened by the 
aforementioned  situations.  The  recovery  plan  should  also  address  the  need  to  replenish 
any depleted pre-funded financial resources and liquidity arrangements so that the CCP 
can remain viable and continue to provide its critical services. 

According  to  the  PFMIs  and  the  final  version  of  the  report,  CCPs  need  to  develop 
comprehensive and effective recovery plans that identify critical operations and services, 
scenarios that may potentially prevent the CCP from being able to continue providing its 
critical services as a going concern, and the strategies and measures necessary to ensure 

77 

 
 
continued  provision  of  critical  operations  and  services  should  those  scenarios  occur. 
Some discretion as to the use of specific tools and as to the order in which they may be 
used could be left in the recovery plans. Even if there is an ex-ante agreement on the use 
of  a  specific  tool,  there  may  still  be  the  possibility  of  making  the  use  of  that  tool 
automatic in a given situation or giving the CCP the possibility of some discretion on the 
use of that specific tool. 

The  primary  responsibility  for  planning  and  implementing  a  CCP's  recovery  plan  rests 
with the CCP itself. It should be endorsed by the CCP's board of directors or equivalent 
governing  body.  The  interests  of  all  stakeholders,  who  are  likely  to  be  affected  by  the 
recovery  plan,  should  be  considered  when  the  recovery  plan  is  being  developed  or 
implemented. Those who would bear losses or liquidity shortfalls should be involved in 
the  formation  of  the  plan.  The  CCP  should  have  an  effective  governance  structure, 
sufficient resources and the necessary powers to implement the recovery plan effectively 
and in a timely manner. In this respect, the CCP needs to assess the legal enforceability 
of the recovery plan, taking into account any constraints imposed by national or foreign 
regulations.  Moreover,  the  CCP  should  test  and  review  its  recovery  plan  regularly,  at 
least  annually  and  following  any  material  change  to  the  plan,  rules  or  procedures. 
Recovery plans should be updated following the completion of each test or review. 

The role of the authorities  

The relevant authorities should ensure that CCPs develop their recovery plans. Moreover, 
the  CCP's  direct  supervisor,  regulator  or  overseer  should  be  responsible  for  ensuring 
compliance  with  this  requirement,  as  well  as  for  monitoring  and  assessing  periodically 
the adequacy of the recovery plan (taking into account also potential impact on market 
participants)103. The relevant authorities should also have the necessary powers to ensure 
that the CCP corrects the deficiencies detected in the recovery plan.  

The  relevant  authorities  should  oversee  the  implementation  of  the  recovery  plan.  They 
should  also  have  the  necessary  powers  to  require  the  implementation  of  recovery 
measures and drive optimal execution when the CCP's execution of the relevant measures 
may be suboptimal in terms of timelines, judgement or discretion, anticipated conflicts of 
interest, uncontrollable external factors and human error resulting in poor or inadequate 
execution. Those powers may include issuing of directions or orders, imposing penalties 
or  fines  or  even  forcing  a  change  of  management.  The  relevant  authorities  should 
coordinate  with  the  designated  resolution  authority,  as  necessary.  Where  a  CCP  is 
systemically  important  to  multiple  jurisdictions,  cooperation  among  authorities  is 
necessary. 

Content of the recovery plan 

The recovery plan should contain the following: (i) the identification of critical services; 
(ii) the identification of stress scenarios; (iii) the identification of recovery triggers; (iv) a 
substantive  description  of  the  recovery  tools;  and  (v)  the  tools  to  address  structural 
weaknesses. 

(i) Identification of the critical services that are important for the CCP's participants and 
other  CCPs  and  to  the  smooth  functioning  of  the  markets  the  CCP  serves  and,  in 
particular,  the  maintenance  of  financial  stability.  Their  identification  should  be  done  in 

103  The implementation of recovery plans by several CCPs at the same time as well as the implementation 
in parallel of the recovery plan of one or more systemically important participants should be taken into 
account in this assessment. 

78 

 
 
                                                            
close  coordination  with  the  relevant  authorities  and  in  consultation  with  relevant 
stakeholders. 

(ii)  Identification  of  the  stress  scenarios,  both  idiosyncratic  and  system-wide  stress 
scenarios, which may prevent the CCP to provide its critical services as a going concern, 
such  as  credit  losses  or  liquidity  shortfalls  created  by  a  participant  default,  business  or 
investment  losses  or  liquidity  shortfalls,  as  well  as  risks  arising  from  other  entities 
belonging to its group or with links with other CCPs.  

(iii) Identification of the criteria, both quantitative and qualitative, which will trigger the 
implementation of all or part of the recovery plan. Triggers should occur early enough to 
have sufficient time for the implementation of the recovery plan. These triggers should 
be followed by careful consideration of the action lines to take. 

(iv) Identification of the recovery tools, as well as the necessary steps and timelines for 
their implementation, which would allow covering extreme stress scenarios not covered 
by  pre-funded  financial  resources  or  liquidity  arrangements.  Where  several  tools  are 
involved,  the  implementation  sequence  of  those  tools  and  an  estimation  of  the  time 
needed to implement each tool should be indicated in the recovery plan.    

(v)  Identification  of  the  tools  to  address  structural  weaknesses,  in  order  to  address  the 
underlying  cause  of  the  weakness,  such  as  revising  risk  management  frameworks, 
replacing  management,  revising  business  strategy,  restructuring  the  services  provided, 
selling business units, merging  with another CCP, reducing risks and taking measures to 
reduce complexity and interconnectedness. 

III. Recovery tools 

CCPs are required under the PFMIs to have recovery tools that allow it to fully allocate 
any  uncovered  losses  and  liquidity  shortfalls.104  A  CCP,  for  example,  will  typically 
collect  margin  (article  41  of  EMIR),  maintain  a  default  fund  (article  42  of  EMIR)  and 
maintain liquid resources to cover its current and potential future exposures and liquidity 
needs.  In  the  event  of  a  clearing  member  default,  the  CCP  can  activate  its  default 
management  process,  utilise  available  resources  in  order  to  meet  its  settlement 
obligations, and allocate any losses as provided for in its rules and procedures. CCPs that 
take on credit risk have a "waterfall" that determines the order in which different types or 
resources are drawn upon to absorb losses (article 45 of EMIR).  

The  PFMIs  also  require  a  CCP  that  faces  credit  risk  to  have  rules  and  procedures  that 
address how credit losses in excess of these financial resources would be allocated. That 
may  be  through,  for  example,  applying  haircuts  to  the  margin  and  collateral  owing  to 
surviving clearing members, and perhaps other types of participants, or through calls for 
additional cash contributions. 

Notwithstanding the precise sequence, participants would need to be bound by these ex-
ante rules and the CCP would therefore have contractual arrangements that should allow 
it to recover from credit losses in many circumstances, such as due to a clearing member 
default, uncovered liquidity shortfalls, losses from general business risks as well as losses 
from custody and investment losses. 

104  CCPs  are  exposed  to  a  great  variety  of  risks  that  could  threaten  their  viability,  and  in  particular  the 
default of a clearing member, potential losses on the CCP's investment portfolio or other business risk. 
79 

 
 
                                                            
In the case of a CCP, enabling it to recover from a clearing member default requires not 
only  loss  allocation  but  also  the  re-establishment  of  a  matched  book  and  restoring  the 
minimum  capital  and  financial  resources  required  by  regulation.  This  is  critical  to 
ensuring that a CCP can meet its on-going obligations to surviving clearing members and 
therefore limit the CCP's exposure to further loss. 

In order to choose the recovery tools, the different effects that the recovery tools could 
have on the CCP, other CCPs to which it is linked, its clearing members and their clients 
as well as the financial system as a whole should be taken into account. The tools should 
be  comprehensive,  effective,  transparent,  measurable,  manageable  and  controllable, 
create the appropriate incentives and have minimum negative impact. Direct participants’ 
exposure to losses should be specified as far as possible in ex-ante rules and agreements 
(pre-funded default resources, additional resources in the event of a default, etc.). Losses 
may be allocated to all direct participants or be limited to participants in product classes. 
Indirect  participants  such  as  clearing  members’  clients  may  be  exposed  to  the  extent 
specified in ex-ante agreements with the relevant participants. Recovery tools may  also 
have an impact on owners or shareholders of the CCP.  

The  following  tools  could  be  used  as  recovery  tools  (and  some  of  them  could  also  be 
used as resolution tools): 

Examples  of  recovery  tools  to  allocate  uncovered  losses  caused  by  a  clearing 
member default: 

  Cash calls on participants, which are additional resources to be provided by clearing 
members  to  the  CCP.  They  can  be  determined  in  different  ways  (a  fixed  amount 
irrespective of the clearing member's assets with the CCP, proportionate to prefunded 
default fund contributions, proportionate to the activity of the participant at the CCP, 
etc.). Cash calls can be capped or uncapped. 

  Variation  margin  haircutting  (or  other  gains-based  haircutting)  by  the  CCP,  which 
consists in the reduction pro-rata by the CCP of the amount that it is due to pay to its 
participants with positive net positions.  

  Initial margin haircutting (in jurisdictions where it is allowed), which would require 
subsequent  replenishment  of  the  initial  margin  haircut.  Noting  that  EMIR  prevents 
CCPs undertaking haircutting. 

Examples of recovery tools to address uncovered liquidity shortfalls: 

  Access to liquidity from third party institutions. 

  Obtain  liquidity  from  non-defaulting  participants,  either  from  participants  who  are 

owed funds or from all participants. 

Examples of recovery tools to replenish financial resources: 

  Cash calls on participants. 

  Recapitalisation or issuance of new equity. 

Examples of recovery tools to allocate losses not related to participant defaults: 

  Recapitalisation. 

80 

 
 
  Explicit insurance or indemnity agreements. 

Examples of recovery tools for a CCP to re-establish a matched book 

  Auction  of  the  open  positions  of  the  defaulted  member(s)  to  the  remaining  non-

defaulting clearing members. 

  Forced allocation of the open positions of the defaulted member(s) to the remaining 

non-defaulting clearing members. 

  Contract termination ('tear-up'). A price should be established upon termination (last 
available  marked  to  market  prices,  and  to  the  extent  that  resources  are  insufficient, 
reduced pro-rata). Termination could be done of all open positions in the CCP, of all 
open  positions  in  a  particular  service,  only  of  the  contracts  needed  to  offset  the 
defaulted  contracts  and/or  contract  tear-ups  subject  to  appropriate  safeguards  to 
minimise impacts on netting sets. 

IV. ENTRY INTO RESOLUTION 

Definition 

According to the CPMI-IOSCO and FSB, resolution should be initiated once a CCP is no 
longer viable, and has no reasonable prospect of sustaining or recovering viability within 
a  reasonable  timeframe  through  other  actions  taken  by  the  CCP  at  the  recovery  stage 
(that do not themselves compromise financial stability). This would, in particular, be the 
case when:  

  recovery  measures  taken  by  the  CCP,  including  the  use  of  its  default  resources  and 
application of any loss  allocation rules, have  failed to  return  the  CCP  to  viability or 
have not been implemented in a timely manner; or 

  the  relevant  oversight,  supervisory  or  resolution  authority  determines  that  recovery 
measures are not reasonably likely to return the CCP to viability or would otherwise 
be likely to compromise financial stability. 

Objectives of a resolution regime 

An  effective  resolution  regime  for  CCPs  should  ensure  continuity  of  critical  CCP 
functions and should pursue financial stability without recourse to public funds. During 
resolution,  critical  functions  of  the  CCP  should  be  maintained  by  the  successor  of  the 
CCP or through an alternative mechanism, including: 

  timely settlement of obligations due to participants and any linked FMI; 

  continuous access of participants to securities or cash accounts provided by the CCP 

and (securities or cash) collateral posted to and held by the CCP; 

  no disruption in the operation of links between the CCP in resolution and other FMIs. 

The  resolution  regime  should  apply  to  systemically  important  CCPs,  whatever  the 
structure of their ownership, but not to CCPs owned and operated by central banks.  

The  resolution  regime  should  also  be  subject  to  the  “no  creditor  worse  off  than  in 
liquidation”  safeguard.  Finally,  the  starting  point  for  allocating  losses  in  resolution 
should be based, as far as practical, on the CCP's ex-ante rules and procedures for loss 
allocation. 

The resolution authority and its powers 

81 

 
 
In principle, a CCP resolution process should be conducted by a resolution authority or 
through  another  entity  with  similar  functions,  such  as  a  special  administrator  or 
conservator.   

The  resolution  powers  that  the  resolution  authority  could  apply  in  respect  of  a  CCP 
should  be  determined  by  the  objective  to  continue  the  CCP's  critical  functions.  They 
should  take  into  account,  in  particular,  the  CCP's  capital  structure,  available  assets, 
default resources, loss allocation arrangements, risk profile, type and number of products 
cleared,  general  business  and  operational  risks  and  the  recovery  measures  taken  by  the 
CCP. The impact on other participants of the CCP, interconnectedness with other CCPs 
or  FMIs,  and  other  stakeholders,  regardless  of  where  they  are  located,  as  well  as  the 
impact on wider financial markets, should also be considered.  

Funding of CCP resolution 

The CCP resolution process should aim at avoiding recourse to public funds. In the event 
that  the  resolution  authority  has  the  power  to  provide  temporary  funding  or  to  place  a 
CCP under  temporary  public ownership  and  control in  order to  ensure continuity  of its 
critical functions, provisions should be made to recover any funds provided by the public 
authorities from shareholders, unsecured creditors (including the CCP's participants) or, 
if necessary, the financial system more widely. 

Co-operation with central banks  

In jurisdictions where the central bank is not at the same time the resolution, supervisory 
or oversight authority of a CCP, the resolution authority or other authority with similar 
functions should consult and cooperate with the central bank when planning or carrying 
out the resolution of the CCP.  

Resolution tools  

There are a number of tools that the resolution authority could choose to apply depending 
on the severity of the situation of the particular CCP and the aspects described at point 3 
above. Certain tools could also apply at a recovery stage as set out in the CCP's rules and 
arrangements with clearing members.  

The rules and procedures for loss mutualisation or allocation applicable to CCPs should 
generally be applied prior to entry into resolution (unless it is necessary or appropriate to 
initiate resolution before those rules  and procedures have  been exhausted for achieving 
the  resolution  objectives).  Where  any  such  rules  and  procedures  have  not  been 
implemented  prior  to  entry  into  resolution,  the  resolution  authority  should  have  the 
power to enforce their implementation.  

Any  licenses,  authorisations,  recognitions  or  memberships  in  other  FMIs  (including 
recognition  for  the  application  of  the  settlement  finality  rules)  granted  to  a  CCP  and 
necessary  for  the  continued  performance  of  its  critical  functions  in  resolution  should 
remain effective until the CCP has been transferred to another entity. They could only be 
revoked for a reason other than entry into resolution.  

Temporary administration:  

The  CCP  resolution  authorities  should  have  the  authority  and  capacity  to  ensure  the 
continued provision of the CCP’s critical functions until the CCP´s viability is restored, 
the  critical  functions  transferred  or  replaced  by  another  provider  or  the  CCP  is  wound 
down in an orderly manner.  

Powers to allocate losses: 

82 

 
 
In  addition,  the  resolution  authority  should  have  the  powers,  subject  to  relevant 
safeguards, to: 

  enforce any existing and outstanding contractual obligations of the CCP's participants 
to  meet cash calls,  make  further contributions to a guarantee or  default fund, or  any 
other CCP loss allocation rules (including the repayment of liquidity providers) where 
they have not already been applied exhaustively prior to the entry into resolution; 

  enforce  existing  and  outstanding  obligations  of  the  CCP  to  participants,  pursuant  to 
the  rules  and  procedures  of  the  CCP  to  accept  allocations  of  the  positions  of  a 
defaulting participant. 

  write down (fully or partially) equity in the CCP; 

  write  down  and/or  convert  to  equity  (“bail  in”)  unsecured  debts  of  the  CCP  in  a 
manner that respects the hierarchy of claims under the applicable insolvency regime;  

  terminate  ( “tear up”) or close-out of contracts;  

  reduce  the  value  of  gains  (in  particular  variation  margin)  payable  by  the  CCP  to 

participants; and 

  Write-down of initial margin where not remote from the insolvency of the CCP and 

where consistent with the applicable legal framework. 

Transfer of critical functions to a third party entity or bridge CCP: 

The  resolution  authorities  should  have  the  power  to  transfer  (notwithstanding  any 
requirements  for  consent  or  novation)  to  a  third  party  purchaser  (alternative  service 
provider)  or  a  bridge  CCP  the  ownership  of  a  CCP  or  all  or  its  critical  operations, 
including  all  associated  rights  and  obligations  and  service-level  agreements.  When  a 
bridge  CCP  is  created,  the  continuity  of  the  CCP's  legal  and  technical  arrangements, 
domestic  or  cross-border  links  with  other  FMIs  or  other  critical  service  providers, 
protection of settlement finality and relevant contractual arrangements should be ensured. 
This  may  require  appropriate  ex-ante  agreements.  Any  licenses,  authorisations, 
recognitions and legal designations of the CCP necessary for the continued performance 
of  its  critical  functions  in  resolution  (including  the  recognition  for  the  purposes  of  the 
relevant settlement finality rules) should be transferred or otherwise applied to the bridge 
CCP.  

Termination (or “tear-up”) of contracts: 

When considering whether to terminate all or part of the outstanding contracts of a CCP, 
the resolution authority should take into account, among other things, the impact on the 
financial stability and the impact on participants’ risk management.  

Moratorium: 

A resolution authority should not impose a moratorium on payments due by the CCP to 
its participants or to any FMIs linked to it if that moratorium would affect the ordinary 
flow of payments, settlements and deliveries being processed by the CCP in the course of 
its  business or  otherwise  jeopardise or  prevent  the  continuity  of  other  critical  functions 
performed  by  the  CCP  or  a  linked  CCP.  The  resolution  authority  could  impose  a 
moratorium on payments to general creditors (that is creditors whose claims are not the 
result of the use of the CCP's critical functions). 

Temporary stay on early termination rights: 

83 

 
 
A  resolution  authority  could  impose  a  temporary  stay  on  the  exercise  by  the  CCP's 
participants and other relevant counterparties of early termination rights and set-off rights 
triggered by entry into resolution of the CCP.  

Resolution planning for CCPs  

CCPs  should  have  in  place  up-to-date  resolution  plans  and  be  subject  to  resolvability 
assessments  by  the  relevant  authorities.  CCPs  should  test  the  effectiveness  of  their 
resolution plans as part of their contingency arrangements.  

A CCP's resolution authority in cooperation with its oversight or supervisory authorities 
(where different) should develop resolution strategies and operational plans to facilitate 
the  effective  resolution  of  the  CCP  in  a  way  that  ensures  continuity  of  the  critical 
functions carried out by the CCP.  

The authorities need to be informed of any impediments arising from the CCP rules and 
procedures  that  could  affect  the  effective  implementation  of  a  resolution  plan.  They 
should have the powers to require the CCP to make changes to improve its resolvability 
including the changes to the arrangements related to delivery, segregation or portability 
of participants’ positions or related collateral or links with other FMIs.  

CCP resolution plans should at least: 

  contemplate  scenarios  where  some  or  all  existing  loss  allocation  arrangements 
between participants under the CCP rules have been fully put into effect, partially put 
into effect, or not implemented;   

  consider  and  address  the  potential  technical  and  legal  barriers  to  the  transfer  of  a 

CCP's functions; 

  contemplate  scenarios  where  there  may  be  no  existing  alternative  provider  to  which 

the critical functions of a CCP can be transferred in the short term; 

  consider legal mechanisms under which collateral is provided (i.e. security interests or 
title  transfer),  the  status  of  collateral  in  insolvency  (i.e.  its  ‘bankruptcy  remoteness) 
and  its  implications,  and  the  extent  to  which  losses  can  be  imposed  under  loss 
allocation rules of the CCP and the exercise of statutory powers; and 

  take into account the impact on indirect participants; 

  draft  transition  agreements  allowing  the  CCP  to  continue  providing  uninterrupted 
critical services on behalf of a purchaser or bridge institution using existing staff and 
infrastructure; and 

  a  'purchaser’s  pack'  including  key  information  on  critical  operations  and  service 

providers, IT procedures, creditors and list of key staff. 

Access to information held by CCPs 

In  order  to  facilitate  the  implementation  of  resolution  measures,  CCPs  should  maintain 
information  systems  and  controls  so  that  they  can  promptly  produce,  both  in  normal 
times and during resolution, the relevant data and information needed for the purposes of 
timely resolution planning and resolution. 

Cross-border co-operation  

Cross-border  Crisis  Management  Groups  (CMGs)  or  other  equivalent  arrangements 
should be put in place for all CCPs considered systemically important in more than one 

84 

 
 
 
jurisdiction.  Resolvability  assessments  should  be  carried  out  by  the  home  resolution 
authority  of  the  CCP  and  coordinated  within  the  CCP´s  CMG  or  under  equivalent 
arrangements, in which authorities assess the feasibility and credibility of implementing 
the resolution strategies and operational resolution plans by assessing in particular:    

  the technical and legal barriers to the transfer of the critical functions to another entity, 
including  those  arising  from  bespoke  nature  of  the  risk  management  and  technical 
processes of individual CCPs;  

  the ability of the transferee to assume and operate the critical functions; 

  the impact of resolution strategies and measures set out in the operational resolution 
plan  on  CCP's  participants  and  on  any  linked  FMIs,  including  their  ability  to  retain 
continuous access to the CCP’s critical functions during the resolution process; 

  the  ability  of  the  CCP  in  resolution  to  maintain  access  to  the  services  of  any  linked 

FMIs and other service providers during the resolution process; 

  the  rights  and  obligations  of  the  linked  FMIs  in  the  event  of  their  failure  that  could 
affect  the  conduct  of  resolution  and  the  ability  to  maintain  enforcement  rights  over 
collateral;   

  any interoperability agreements and any cross-margining or loss-sharing arrangements 

with other CCPs; 

  the  likely  implications  for  resolution  (including  the  availability  of  funds  to  repay 
liquidity  providers)  of  the  implementation  of  the  CCP  recovery  plan,  including  any 
rules and procedures for loss allocation or forced allocation of contracts; and 

  where  the  resolution  plan  provides  for  the  transfer  of  the  critical  CCP  functions  to 
another  entity  or  bridge  institution,  the  robustness  of  any  arrangements  in  place  to 
facilitate  the  transfer  and  maintain  continuity,  including  of  the  legal  and  technical 
arrangements, such as delivery-versus-payments arrangements. 

85 

 
 
 
ANNEX  IV  –  RELEVANT  US  REGIME  REGARDING  CRISIS  MANAGEMENT  OF  NONBANK 
FINANCIAL INSTITUTIONS  

Treatment of non-banks other than financial market utilities  
As per rules finalised in April 2013,105 any non-bank company predominantly engaged in 
financial  activities  (banking,  insurance,  investment  services,  fund  management,  etc.) 
whose  material  financial  distress  (failure)  or  whose  nature,  scope,  size,  scale, 
concentration,  interconnectedness,  or  mix  of  activities  (risk  profile  and  on-going 
activities) could pose a threat to the financial stability of the US, can be designated by the 
Financial  Stability  Oversight  Council  (FSOC)  for  supervision  by  the  Federal  Reserve, 
including the application of Dodd-Frank prudential standards.  

When  they  account  for  85%  of  their  consolidated  revenues  or  assets,  non-bank 
companies  are  considered  to  be  predominantly  engaged  in  financial  activities.  Foreign 
non-bank companies can also be caught with the difference that only their US assets and 
operations are considered (as opposed to the global ones of US non-banks). 

Besides  supervision  and  capital  requirements,  Dodd-Frank  prudential  standards  include 
the  obligation  to  draw  up  resolution  plans  and,  if  the  conditions  are  met,  possible 
resolution by the Federal Deposit Insurance Corporation (FDIC) under Title II of Dodd-
Frank. 

The FSOC process consists of three steps. It is based on an analytical framework derived 
from  10  criteria  in  Dodd-Frank  for  determining  systemic  relevance.  These  are  grouped 
into  six  drivers  (size,  interconnectedness,  substitutability,  leverage,  liquidity  risk  and 
maturity  mismatch,  existing  regulatory  scrutiny)  taken  to  be  key  in  whether  or  not  the 
company’s failure or activities could cause systemic problems via contagion and losses 
for  other  market  participants  or  via  disruption  to  a  critical  function  of  market-wide 
importance. 

The  first  step  catalogues  any  non-bank  company  fulfilling  the  85%  criteria  which  has 
$50bn  in  consolidated  assets  and  which  meets  one  of  five  other  quantitative  thresholds 
($30bn  outstanding  credit  default  swaps,  $3.5  of  derivative  liabilities,  $20bn  debt 
outstanding, 15 to 1 leverage ratio, and a 10% ratio of short-term (1 year) debt to total 
assets). The FSOC can always include a company from outside these criteria as well, if it 
considers  further  analysis  to  be  necessary.  For  now,  it  anticipates  that  fewer  than  50 
companies will be considered in step 1. 

The  second  step  involves  a  targeted  company-by-company  analysis  of  this  subset.  The 
data used will consist primarily of information in the public domain and obtained from 
other regulatory authorities.     

Step three consists of the notification process with regard to a given company which is 
considered to merit in-depth review. It will have to provide any information requested by 
the FSOC, which will establish whether the company’s failure or risk profile is such as to 
require final designation as systemically relevant. At the conclusion of stage 3 the FSOC 
may,  by  a  two  thirds  majority,  make  a  proposed  determination  regarding  the  company. 
The  company  can  request  a  hearing  to  contest  this,  after  which  another  vote  is  taken 
again requiring a two thirds majority. There is also the possibility of judicial review. 

105  http://www.treasury.gov/initiatives/fsoc/Documents/Nonbank%20Designations%20-

%20Final%20Rule%20and%20Guidance.pdf; 
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20130403a.pdf   

86 

 
 
                                                            
In  July  2013, the FSOC designated the following two nonbank companies as  systemic: 
American  International  Group,  Inc.  and  General  Electric  Capital  Corporation,  Inc.  In 
September 2013, it designated Prudential Financial, Inc. as systemic. In December 2014, 
it  designated  MetLife,  Inc.  as  systemic.  In  June  2016  the  FSOC  rescinded  General 
Electric Capital Corporation's designation as systemically important financial institution. 

Financial market utilities (clearing, payment, and settlement infrastructures) 

Financial market utilities (FMUs), comprising companies engaged in payment, clearing, 
or  settlement  activities,  are  considered  and  designated  by  the  FSOC  separately106.  The 
main decisive factors are the aggregate monetary value of transactions processed by the 
FMU, the aggregate exposure to its counterparties, the effect that its failure or disruption 
would  have,  and  the  relationship,  interdependencies,  or  other  interactions  with  other 
FMUs. 

The  designation  process  in  relation  to  FMUs  consists  of  two  steps.  First,  the  FSOC 
makes a preliminary determination of FMUs whose failure or disruption could, based on 
the above factors, potentially increase the risk of significant liquidity and credit problems 
in financial markets and thereby threaten financial stability. Second, those identified are 
subject to further review, with more focus on qualitative factors.  The final determination 
requires a two thirds majority within FSOC. 

Like  with  the  other  nonbank  companies,  if  the  FSOC  determines  any  FMU  to  be 
systemic, it becomes subject to higher regulatory and prudential standards by its primary 
regulator  (usually  either  the  CFTC  or  SEC)  and  by  the  Federal  Reserve.  This  includes 
enforcement  powers  such  as  issuing  cease  and  desist  orders  and  removing  personnel 
responsible for bad practices. Even though Dodd-Frank doesn’t explicitly subject FMUs 
to  resolution  or  orderly  liquidation  under  Dodd-Frank,  it  is  understood  that  the  FDIC 
would have jurisdiction in this case.   

In July 2012, the FSOC designated the following eight FMUs as systemic: The Clearing 
House  Payments  Company  L.L.C.,  CLS  Bank  International,  Chicago  mercantile 
Exchange,  Inc.,  The  Depository  Trust  Company,  Fixed  Income  Clearing  Corporation, 
ICE  Clear  Credit  LLC,  National  Securities  Clearing  Corporation,  and  The  Options 
Clearing Corporation. 

106  http://www.treasury.gov/initiatives/Documents/Finalruledisclaimer7-18-2011.pdf  

87 

 
 
                                                            
ANNEX V – THE BENEFITS AND CONSEQUENCES OF CCP CLEARING 

CCPs can contribute to the stability of the financial system by reducing the disruptions 
associated with the replacement of defaulted positions. For example, in contrast to typical 
futures  or  exchange-traded  options  positions,  OTC  derivatives  portfolios  often  include 
positions accumulated and held over extended time periods. Thus, the magnitude of the 
positions that must be replaced or hedged in a short period following a default is likely to 
be  very  large  relative  to  normal  order  flows.  They  could  have  notional  values  in  the 
trillions of dollars.  

CCPs can reduce price volatility and the incidence of extreme price moves that can occur 
when  a  large  trading  firm  defaults.  CCPs  can  mitigate  the  destabilising  effects  of  the 
replacement of defaulted positions by: (a) reducing (via position netting) the magnitude 
of  positions  that  need  to  be  replaced;  (b)  transferring  customer  trades  to  solvent  CCP 
members;  and  (c)  coordinating  the  orderly  replacement  of  defaulted  trades  through 
auctions  and  orderly  hedging  of  exposures  created  by  defaults.  These  measures  can 
reduce  the  knock-on  price  movements  that  result  from  a  large  default  or  defaults 
precipitated by an asset price shock. 

(a) Position netting 

Multilateral  netting  allows  members  and  participants  to  collate  numerous  sales  and 
purchases of the same asset into a single net obligation to settle against the CCP, instead 
of many obligations to settle against many different trading parties. CCPs can thus help 
to increase liquidity in a market.  

(b) Transfer of clearing member positions 

CCP  rules  facilitate  the  portability  of  positions  held  in  accounts  at  a  troubled  CCP 
clearing  member(s)  to  financially  sound  members.  This  reduces  the  likelihood  that  a 
defaulting clearing member‘s clients will lose out as result of a clearing member default, 
reducing the risk that the client's margin will be encumbered by the bankruptcy process, 
and  facilitates  the  ability  of  client  to  trade  unhindered  by  the  default  of  their  clearing 
member.  Furthermore,  a  well-managed  centralised  auction  mechanism  can  be  more 
liquid,  and  result  in  smaller  price  disruptions,  than  uncoordinated  replacement  of 
positions  during  periods  of  pronounced  uncertainty.  By  reducing  the  concentration  of 
default exposures and allocating default losses more efficiently, CCPs can mitigate and 
sometimes eliminate the potential for cascading defaults.  

(c) Coordinated replacement 

Central  clearing  is  subject  to  strong  economies  of  scale  and  scope  arising  from  netting 
economies  and  diversification  effects,  favouring  the  use  of  a  small  number  of  large 
CCPs.  The  creation  of  multiple  CCPs  can  lead  to  fragmentation  which  results  in 
incomplete realisation of the economies of scale and scope. If the same product is cleared 
in  CCPs in  multiple jurisdictions, some position netting opportunities will be foregone, 
thereby reducing the efficiency of capital utilisation and increasing the costs and risks of 
position  replacement  in  the  event  of  default.  Clearing  of  different  products  at  different 
CCPs  results  in  the  loss  of  some  close-out  netting  possibilities,  and  efficiencies  from 
portfolio margining. 

Clearing  of  the  same  product  in  multiple  CCPs  can  also  fragment  liquidity.  Without 
interoperability of CCPs, counterparties to a trade would have to agree on which CCP to 
use. Some may be unwilling or unable to agree, thereby reducing the potential number of 

88 

 
 
counterparties  and  liquidity.  This  problem  can  be  mitigated  to  the  extent  that  market 
participants  (or  their  brokers)  make  arrangements  to  clear  at  multiple  CCPs,  but  this 
increases costs and operational burdens. Similarly, firms can clear through firms that are 
members of multiple CCPs. Maintaining multiple memberships imposes additional costs 
and  operational  challenges  on  the  intermediaries.  Moreover,  this  means  of  facilitating 
connections of end users to multiple CCPs tends to encourage the concentration of client 
business  in  a  small  number  of  clearing  member  firms.  This  concentration  has  systemic 
implications. Interoperability between CCPs clearing the same product can mitigate these 
problems,  but  this  exposes  each  CCP  to  the  credit  risk  of  those  with  which  it 
interoperates. 

This tendency towards the dominance of clearing by a small number of large CCPs (and 
clearing  members)  makes  these  entities  highly  systemically  important.  But  impeding 
consolidation  would  prevent  CCPs  from  realising  all  of  the  risk-reducing  benefits  of 
scale and scope. At the same time, the financial resources of CCPs are not unlimited and 
sufficiently severe defaults (especially, multiple defaults) could threaten their solvency.  

89 

 
 
 
ANNEX  VI  –  DATA  ON  EUROPEAN  CCPS  AND  RECENT  TRENDS  IN  THE  INCREASE  IN 
OTC CLEARING 

A: Cash markets 

Main CCPs––Cash Markets107 

System 

Description 

CC&G 

CCP Austria 

EUREX Clearing 

LCH.Clearnet 
Limited 

LCH.Clearnet SA 

EuroCCP 

European 
Multilateral Clearing 
Facility (EMCF) 

part 

the  Italian 

CCP  clearing  for 
markets. 
CCP  for  Austrian  cash  and 
derivative markets 
CCP  incorporated  in  Germany, 
offering  clearing  services  for 
derivatives  and  equities  traded 
on German markets. 
Part  of  the  LCH.Clearnet  group. 
Clears  equities  and  derivatives 
for  various  platforms,  including 
the  London  Stock  Exchange. 
Swapclear 
of 
is 
LCH.Clearnet Limited and is the 
largest  CCP  for  interest  rate 
swaps globally. 
Part  of  the  LCH.Clearnet  group. 
Clears  equities  and  derivatives 
in 
for 
the  Euronext  markets 
the 
France, 
Belgium, 
Portugal; 
Netherlands 
and 
for  MTS 
government  bonds 
Italy;  equity 
for  Bourse  de 
Luxembourg  bonds  and  several 
electronic trading platforms 
CCP  incorporated  in  the  U.K.; 
clearing  in  17  other  markets  in 
Europe and the US. 
the 
in 
CCP 
Netherlands;  clearing 
for  19 
European  markets  through  nine 
different  exchanges  and  trading 
platforms. 

incorporated 

Statistics  (value  of  cash 
securities 
transactions, 
2011) 

€3 trillion 

€0.08 trillion (in 2010) 

€3 trillion 

€4 trillion (in 2009) 

€6 trillion 

NA 

€6 trillion 

KELER CCP 

CCP for Hungarian market 

NA 

107  Source ECB. N.B. In April 2014 the merger of EuroCCP and EMCF was completed. 

90 

 
 
 
                                                            
B: EU CCPs offering clearing of OTC derivatives108 

Asset Class 

CCPs 

Interest rate 

Credit 

CME Clearing Europe 

Eurex Clearing 

KDPW CCP 

LCH.Clearnet Ltd. 

Nasdaq OMX Stockholm 

Eurex Clearing 

ICE Clear Europe 

LCH.Clearnet SA 

Location 

UK 

Germany 

Poland 

UK 

Sweden 

Germany 

UK 

France 

Holland Clearing House 

The Netherlands 

Equity 

MEFF 

Nasdaq OMX Stockholm 

CME Clearing Europe 

European Commodity Clearing 

ICE Clear Europe 

Commodities 

LCH.Clearnet Ltd. 

MEFF 

Nasdaq OMX Stockholm 

OMI Clear 

LCH.Clearnet Ltd. 

Foreign 
Exchange 

C. Ownership models109 

Spain 

Sweden 

UK 

Germany 

UK 

UK 

Spain 

Sweden 

Portugal 

UK 

User-owned 

Non-user-owned 

Hybrid 

Australia 

Belgium* 

Canada 

France 

Germany 

Hong Kong SAR 

India 

Italy 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes  

Yes 

Yes 

108  Source:  OTC  Derivatives  Market  Reforms,  Seventh  Progress  Report  on  Implementation,  Financial 

Stability Board, April 2014  

109  Source: www.bis.org 

91 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Japan 

Netherlands* 

Russia 

Sweden 

Switzerland 

United Kingdom 

United States 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

D. Recent trends in the increase of clearing of OTC derivatives  
It has been estimated that between 30% and 70% of OTC derivatives may be sufficiently 
standardised and liquid for central clearing, depending on the product class (interest rate 
swaps,  credit  default  swaps,  and  other  OTC  derivatives).110  In  June  2013,  the  global 
notional amount of outstanding OTC derivatives was estimated at USD 693 trillion.111 At 
end-June  2013,  it  was  estimated  that  around  65%  of  OTC  interest  rate  derivatives  and 
40% of OTC credit derivatives transactions were being centrally cleared, up respectively 
from  40%  and  25%  at  the  start  of  2013.112  In  terms  of  notional  amounts,  without 
adjusting for double counting arising from novation, it was estimated that the volume of 
cleared OTC transactions at the end of 2012 totalled USD 346.4 trillion, of which USD 
341.4  trillion  was  attributable  to  interest  rate  derivatives  and  USD  5  trillion  to  credit 
default  swaps  (CDSs).  In  February  2014,  adjusting  for  double  counting  the  global 
volume of cleared derivatives transactions was estimated to be around USD 191 trillion 
(mostly  interest  rate  swaps)  or  approximately  46%113  of  all  derivatives  trades.  In 
February  2014,  public  figures  from  the  US  Commodity  Futures  Trading  Commission 
indicate that 70% of new single currency interest rate derivatives and 95% of new credit 
derivative  indices  trades  are  centrally  cleared114.  Estimates  of  how  increased  CCP 
clearing of OTC derivatives will increase the demand for collateral vary from EUR 0.1 to 
0.6 trillion115 to EUR 2.0 to 4.0 trillion116 117. 

110  IMF, Global Financial Stability Report (Chapter 3, April 2010); Non-Cleared OTC Derivatives: Their 

Importance to the Global Economy, March 2013, ISDA. 

111 Semi-annual OTC derivatives statistics, Bank of International Settlement (June 2013) 

http://www.bis.org/statistics/dt1920a.pdf  

112  OTC derivatives markets reforms – sixth progress report on implementation, Financial Stability Board, 

September 2013, based on figures from the US Depository Trust & Clearing Corporation.  

113  OTC  derivatives  markets  reforms  –  seventh  progress  report  on  implementation,  Financial  Stability 
Board, April 2014. These are notional figures which do not reflect the actual scale of risk exposures. 
Measuring for  market  value and  taking  account of  collateral and netting  reduces  the  amount  to  some 
0.3-0.5%  of  the  notional  amount.  See  ISDA  OTC  derivatives  market  analysis,  year-end  2012  (June 
2013)  http://www2.isda.org/functional-areas/research/studies/     

114  OTC  derivatives  markets  reforms  –  seventh  progress  report  on  implementation,  Financial  Stability 

Board, April 2014. 

115 Bank of England Financial Stability Report, June 2013 (p.50-51) 

to 
http://www.bankofengland.co.uk/publications/Documents/fsr/2013/fsrfull1306.pdf.  According 
estimates by ESMA, the supply of high quality collateral was around EUR 12.2tn as of 2012, the bulk 
of which consisted of sovereign bonds. The demand for collateral is around EUR 4.1tn, mainly for repo 
operations, exchange-traded and OTC derivatives and securities lending. 

116  "Towards a new collateral landscape," Speech by Yves Mersch, Member of the Executive Board of the 
ECB,  at  the  2nd  Joint  Central  Bank  Seminar  on  Collateral  and  Liquidity  hosted  by  the  ECB  and  the 
Deutsche Bundesbank, 17 September 2014 
http://www.ecb.europa.eu/press/key/date/2014/html/sp140917.en.html  

92 

 
 
 
 
 
 
 
 
 
 
                                                            
 
E. Membership of global systemically important banks of leading global CCPs (compiled by the FSB)  

94 

 
 
 
95 

 
 
 
 ANNEX VII – COMPETITION AND CCP INTEROPERABILITY 

The  Commission  has  been  taking  steps  to  enhance  competition  in  European  post-trade 
services and remove barriers to efficiency. Freedom to provide cross-border services and 
competition  among  multiple  CCPs  has  been  enshrined  in  EMIR.  To  consolidate  this, 
provisions for CCPs' to have non-discriminatory access to exchange trade data feeds are 
included in the Markets in Financial Instruments Regulation (MiFIR).118 

EMIR also provides for interoperability between CCPs. Interoperability provides trading 
firms  with  the  full  ability  to  select  a  CCP  of  their  choice  rather  than  be  limited  to  the 
choice made available by the trading venue, and to derive netting benefits and minimise 
the  frictional  costs  of  clearing.119  Overall,  competition  and  interoperability  between 
CCPs  should  contribute  to  deepen  and  further  integrate  European  capital  markets  and 
increase liquidity. 

The ability for trading firms to choose among multiple CCPs has increased  since 2007, 
aided by the entry into force of MiFID. Interoperability between some CCPs has become 
a reality since 2011. In 2012, trading venues such as regulated markets and multilateral 
trading  facilities  representing  approximately  65%  of  European  trading  volume  by 
numbers  of  transactions  have  given  access  to  their  trade  feeds  to  at  least  one  of  the 
interoperating  CCPs.  Meanwhile,  traders  have  demonstrated  considerable  interest  in 
consolidating their trade flow through a CCP of their choice.   

Commercial interests continue to be the primary obstacle to developing competition and 
interoperability for clearing across all trading venues. A trading venue that owns or has 
financial control over a CCP has little immediate incentive to let a third-party CCP share 
in  its  clearing  revenues  unless  trading  firms  put  significant  pressure  on  this  venue  to 
demand access or interoperability and put the venue at risk of seeing liquidity shift away 
to a competing trading venue. A CCP may also be reluctant to trust another CCP’s risk 
management to the full degree. 

Furthermore, structuring an interoperability agreement across jurisdictional lines can be 
complex, not least due to differences in bankruptcy law (and its treatment of collateral). 
Interoperability requires close coordination between CCPs, particularly in a crisis: a CCP 
interconnection  is  an  essential  linkage  that  can  fail.  Coordination  of  the  respective 
regulatory authorities can also be difficult if there are substantive differences across legal 
and regulatory regimes.  

These  difficulties  make  it  challenging  to  create  robust  competition  and  interoperability 
arrangements.  Clearing  could  thus  remain  fragmented  across  products,  and  between 
Member States. This fragmentation would tend to keep the costs of clearing high, as well 
as to reduce market liquidity. 

118  http://ec.europa.eu/internal_market/securities/isd/mifid2/index_en.htm  
119  Users are able to most freely choose a CCP when there is full interoperability: that is, a trading venue 
gives its trade feed to a CCP that wants to clear its trades, and the incumbent CCP(s) interoperates with 
a  newcomer.  If  either  condition  is not fulfilled,  users  do  not  have  free  choice  because  which  CCP  is 
made available to them is determined by the trading venue and the incumbent CCP(s). 

96 

 
 
 
                                                            
ANNEX VIII – HOW A CCP COULD FAIL 

A CCP may enter into financial distress as a result of clearing member(s) default (default 
events)  or  due  to  operational  reasons  such  as  losses  on  the  CCP’s  investments  (other 
(non-default) events) or a combination of the two.  

Default  event  –  the  CCP,  based  on  its  internal  rules  designates  more  than  one 
significant clearing member as being in default 

Notwithstanding  the  provisions  of  the  BRRD  safeguarding  their  functioning,  a  CCP 
default  could  follow  the  default  of  one  or,  more  likely,  several  clearing  members.  A 
clearing member could be designated as being in default either because it is insolvent or 
because it is insufficiently liquid to meet a margin (or delivery) settlement obligations. If 
the defaulter’s margin with the CCP is insufficient to cover its obligations due, inter alia, 
to  possible  mispricing  by  the  CCP,  the  CCP  would  have  to  call  upon  the  other  EMIR 
financial  resources,  including  its  equity  and  default  fund  and  it  may  further  call  on 
additional  capital  or  cash  contributions  by  its  remaining  members.120  If  all  of  these 
resources are exhausted as a result of the member default(s), the CCP would default on 
its obligations to other members and their clients. 

Other (non-default) events – arising from:  

  Lack of liquidity 

A  CCP  could  also  default  due  to  a  lack  of  liquidity.  For  instance,  in  the  event  of  a 
member default, the CCP is obligated to make a timely payment to those owed variation 
margin  payments.  This  will  require  the  CCP  to  liquidate  the  defaulter‘s  collateral,  and 
perhaps  some  of  its  own  assets.  The  CCP  may  also  attempt  to  borrow  to  meet  its 
obligations.  If  such  collateral  sales  and  borrowings  occur  during  stressed  market 
conditions  (which  is  when  a  large  member  default  is  most  likely),  the  CCP  may  be 
unable to raise sufficient funds to meet its obligations in the short time available to do so. 
This  uncertainty  could  compel  members  and  their  clients  to  close  out  (crystallise  and 
terminate) contracts, rein in trades and could cause markets to seize up.  

CCPs  could  also  lack  liquidity  to  undertake  its  normal  business  due  to,  for  example, 
significant  cyber-attacks  or  fraud,  whereby  these  events  could  wipe  out  a  CCPs 
operational and business capital. 

  Vulnerability to market movements 

The nature of CCPs  makes  them  most vulnerable to  default at the times  when they are 
most needed as a systemic shock-absorber. In particular, they are susceptible to wrong-
way risk, in which the financial condition of the CCP is weakest at the time its financial 
obligations  are  greatest.  Wrong-way  risk  tends  to  be  largest  for  the  most  senior 
component  of  payment  ‘waterfalls’  and  highly  rated  counterparties.  These  features  are 
characteristic  of  CCPs.  Entities  with  these  characteristics  seldom  fail,  but  their  failure 

120  How margin is collected can also play a role. Margin can be posted by granting a security interest or 
under a title transfer agreement; CCPs can collect margin on a net or gross basis; it can be posted in the 
form of securities or cash; it can be held by a clearing member, the CCP or a third party custodian; it 
can be segregated from or co-mingled with other assets; it can be subject to liens or setoff rights; and 
can be subject to re-hypothecation. For example, segregation of margin affects the risk that customers 
will lose some or all of their collateral in the event of a default. Higher segregation is more costly and 
can facilitate portability. But it can decrease users’ incentives to monitor the risks of the CCP and their 
clearing member.  

97 

 
 
                                                            
tends  to  occur  concurrently  with  large  asset  price  movements,  whereby  they  are 
overwhelmed by extraordinary market movements and can themselves exacerbate market 
crises.  

  Losses related to CCP investments 

A  CCP  could  conceivably  fail  due  to  its  own  investment  practices.  In  many  European 
countries, collateral passes by title transfer agreement (i.e. the CCP receives the income 
from investing collateral and has the authority to invest collateral). As a result, the trader 
responsible for investing this  collateral may engage in  excessively risky investments to 
earn a high profit. A CCP should rely on its own equity capital or insurance (as opposed 
to  the  default  fund)  to  cover  any  loss  incurred  by  such  activity.  CCPs  can  reduce  their 
vulnerability by abiding by regulatory requirements and establishing restrictive policies 
regarding permissible investments, but the possibility of overwhelming losses cannot be 
discounted. 

98 

 
 
 ANNEX IX – CCP FINANCIAL RESOURCES “WATERFALL” AND INCENTIVES 

The following is available to the CCP should one or more clearing member be designated 
as being in default in accordance to the CCP's internal rules. 

  Defaulter’s contribution 

CCPs conventionally rely on a “waterfall” of financial resources to absorb the default of 
their  member  firms.  The  first  element  of  this  waterfall  is  the  defaulter's  margin.  The 
second element is the defaulter’s contribution to the CCP default fund (or its equivalent). 
In  a pure defaulter  pays model, these  elements would always be sufficient to cover the 
obligations  of  defaulting  firms,  but  it  is  inefficient  to  impose  margin  or  default  fund 
contributions that would cover exposures at default under all eventualities because of the 
opportunity costs this would entail. 

  Other resources 

Once  the  resources  contributed  by  a  defaulter  are  exhausted,  CCPs  can  utilise  other 
resources to mutualise the loss. One source can be its own equity and/or the default fund 
contributions  of  non-defaulting  members.  If  default  losses  exceed  even  this  element  of 
the  waterfall,  CCPs  typically  have  the  right  to  ask  non-defaulting  members  to  make 
additional  contributions.  These  additional  “rights  of  assessment”  are  commonly  limited 
to a firm's initial contribution to the default fund. Under some circumstances, CCPs may 
utilise the margins of non-defaulting customers of a defaulting clearing member firm to 
satisfy  the  obligations  of  any  client  of  a  defaulting  clearing  member  –  specifically,  if 
client  funds  are  held  on  an  omnibus  basis.  However, this  is  not  an  option  under  EMIR 
and therefore is not available to EU CCPs. 

Outside the EU, CCPs could order the various elements of the waterfall  in a variety of 
ways.121  Ordering  affects  the  incidence  of  loss  and  its  magnitude  via  the  effect  on 
incentives.  For  instance,  putting  CCP  capital  at  risk  at  the  first  stage  of  the  waterfall 
(after the defaulter‘s resources) provides the CCP with a strong incentive to control risk, 
monitor  its  members  and  choose  prudent  margin  levels  (this  is  the  order  established 
under EMIR). It is however considered to be inefficient to require the CCP to have pre-
financed funds to absorb an arbitrary number of member defaults. A better alternative is 
to  require  CCPs  to  have  a  funding  mechanism  that  is  activated  in  the  aftermath  of  the 
first  default  and  of  every  subsequent  member  failure.  Pre-committed  conditional  funds 
would  reduce  the  likelihood  of  a  ‘run’  provided  those  who  have  committed  to  provide 
additional financing are widely believed to be able to perform on those obligations. This 
would  likely  imply  obtaining  these  commitments  from  financial  entities  that  are  not 
participants in the CCP, such as insurance companies or unlevered real money investors. 

The nature of CCPs’ default resources entails some challenges for policy-makers, CCPs 
and  clearing  members.  While  on  the  one  hand,  higher  limits  on  the  amount  of  funds 
CCPs can call from clearing members increases their ability to withstand defaults, on the 
other  hand,  higher  limits  increase  the  possibility  of  contagion    as  the  non-defaulting 
clearing  members  might  have  to  cover  significant  losses  that  can  result  from  large 
clearing  member  defaults.  This  would  largely  defeat  the  intent  of  clearing  mandates, 
which  is  to  limit  the  exposure  of  financial  firms  to  counterparty  risk.  Furthermore, 

121  For a discussion on the relative merits of different ways to balance initial margins and default funds to 
mitigate  or  mutualise  losses,  see  ”Central  Counterparties  and  their  financial  resources  –  a  numerical 
approach,”  Bank 
2013) 
http://www.bankofengland.co.uk/publications/Pages/fsr/fs_paper19.aspx   

of  England 

Paper  No. 

Financial 

Stability 

(April 

19 

99 

 
 
                                                            
concerns about uncertain clearing member exposure to CCP cash calls can increase the 
likelihood  of  ‘runs’  on  members.  Due  to  these  considerations,  the  ability  of  CCPs  to 
make large, unlimited cash calls can induce the structuring of clearing members in ways 
that limits the amount of cash that a CCP can request. 

100 

 
 
ANNEX X – FAILURES AND NEAR-FAILURES OF CCPS

122

Central  counterparty  (CCP)  failures  have  been  extremely  rare—there  have  been  only 
three  going  back  to  1974.  There  are  additional  instances  of close  calls  or  near  failures. 
This  annex  reviews  the  circumstances  behind  the  three  failures  as  well  as  two  near 
misses. 

CCP failures 

  The Caisse de Liquidation clearing house in Paris was closed in 1974 as a result of 
unmet margin calls by one large trading firm after a sharp drop in sugar prices on the 
futures exchange. One of the primary causes of the failure was that the clearing house 
did  not  increase  margin  requirements  in  response  to  greater  market  volatility.  Also, 
although  it  lacked  the  authority  to  order  exposure  reductions,  the  clearing  house 
should have informed the exchange (which had the authority) of the large size of the 
exposure  of  Nataf  Trading  House.  The  problem  was  further  aggravated  when  the 
clearing  house  used  questionable  prices  and  non-transparent  methods  to  allocate 
losses  among  clearing  members,  leading  to  considerable  legal  disputes  (which 
included a decision by a court of appeal to reverse this judgement and the refusal of 
two of Nataf's guarantors to cover the sums they were deemed to owe). This closed 
the sugar market remained closed for two years, leading to significant disruption. 

  The Kuala Lumpur Commodity Clearing House in Malaysia was closed in 1983 as a 
result  of  unmet  margin  calls  after  a  crash  in  palm  oil  futures  prices  on  the  Kuala 
Lumpur  Commodity  Exchange.  Six  large  brokers,  who  had  accumulated  positions 
worth USD 70 million, defaulted as a result of the large losses that were generated by 
the  price  collapse.  Again,  the  clearing  house  did  not  sufficiently  increase  margin 
requirements  in  response  to  greater  market  volatility.  Furthermore,  there  was  a 
coordination breakdown between the clearing house and the exchange, which did not 
exercise its emergency powers to suspend trading. Also, careless trade confirmation 
and registration resulted in long delays in ascertaining who owed what to whom. 

  The  Hong  Kong  Guarantee  Corporation    was  closed  for  four  days  and  had  to  be 
bailed out  by the government in  1987 as  a result of fears  of unmet  margin  calls  on 
purchased equity futures positions following the October stock market crash. Adding 
to the problem was that many of the sold equity futures positions were being used to 
hedge  purchases  of  stocks,  so  that  a  failure  on  the  futures  contract  would  likely 
require additional selling pressure by those holding the stocks themselves. Yet again, 
margin  was  not  raised  in  amounts  commensurate  with  rising  volatility,  plus  many 
brokers were not diligently collecting margin from their customers. Also, there was a 
lack  of  coordination  between  those  monitoring  the  market  and  those  providing  the 
guarantees  due  to  the  separation  of  ownership  of  the  exchange,  the  clearing  house, 
and the contract guarantee fund. In addition, there were no position limits and market 
risk  became  concentrated  in  a  few  brokers  and  customers  (five  of  102  brokers 
accounted for 80 per cent of open sold contracts). 

Near-Failures 

122  Regarding  CCPs,  this  annex  is  taken  and  shortened  from  the  IMF  Global  Financial  Stability  Report: 
Meeting  New  Challenges  to  Stability  and  Building  a  Safer  System  (April  2010),  Chapter  3,  Making 
Over-The-Counter Derivatives Safer: The Role of Central Counter Parties, Box 3.5: History of Central 
Counterparty Failures and Near Failures; http://www.imf.org/external/pubs/ft/gfsr/2010/01/    

101 

 
 
  
                                                            
Also  in  the  wake  of  the  October  1987  crash,  both  the  Chicago  Mercantile  Exchange 
(CME) and the Options Clearing Corporation (OCC) encountered severe difficulties in 
receiving margin. In the case of the CME, failure was averted when its bank, Continental 
Illinois, advanced the clearing house $400 million just minutes prior to the opening bell 
in order to complete all the $2.5 billion in necessary variation margin payments. These 
included a $1 billion payment from a major broker-dealer that had remained outstanding 
despite  assurances  from  its  executive  management  of  its  ultimate  arrival.  Although  the 
crisis was averted, the CME realized that clearing members retained too much discretion 
over  the  timely  payment  of  margin  and  thus  adopted  a  policy  of  automated  payments 
from clearing members. 

At  the  same  time,  similar  problems  occurred  in  clearing  equity  options  trades  on  the 
Chicago Board Options Exchange. A large clearing member at the OCC had difficulties 
meeting its margin calls and required an emergency loan from its bank in order to avoid 
non-compliance.  The  OCC  was  also  plagued  by  some  operational  problems,  including 
the lack of an automatic payment system, and the OCC was late in making payments to 
its CMs. Also, the OCC and CME did not have joint or linked clearing arrangements, so 
traders who hedged options with futures on the CME experienced delays in transferring 
gains realized at one clearing house to cover losses at another. 

102 

 
 
ANNEX XI – NUMERICAL EXAMPLES OF LOSS-ALLOCATION TOOLS AND STAKEHOLDER 
POSITIONS 

A) Numerical examples of loss-allocation tools123 
The  following  example  provides  an  illustration  of  how  losses  may  be  allocated  by  the 
application of each of four mechanisms: cash call; variation margin haircutting; complete 
tear-up  of  outstanding  transactions;  and  selective  tear-up124.  In  practice,  loss-allocation 
rules can involve more than one of these mechanisms in combination. 

Consider a CCP clearing cash-settled futures in product x and product y. For simplicity, 
we assume that initial margin and default fund are of value zero. Suppose the members’ 
open positions at the time of default are as shown in the table below: 

Member 

Position 

Change 
market 
valuation since default 

in  mark-to-
mid-price 

A (defaulter) 

B 

C 

D 

-1 product x  

-2 product y 

+1 product x 

+ 2 product y 

-€2 

-€6 

+€2 

+€6 

The change in mark-to-market mid-price valuation is used to calculate variation margin 
obligations. So the CCP is due to pay €8 in variation margin (€2 to Member C and €6 to 
Member D). 

Subsequent  to  calculating  variation  margin  obligations,  the  CCP  holds  an  auction  to 
dispose of Member A’s positions and return to a matched book. Suppose that the price, 
established in auction, at which members will take on Member A’s positions is -€4 (i.e. 
the CCP must pay €4 to a member in order for that member to take on a position of  -1 
product x). This means that the CCP must pay out an additional €4 in order to return to a 
matched book. Note that the auction price of -€4 is at a premium to the mark-to-market 
mid-price valuation of -€2 used to calculate variation margin obligations.  

So  in  total,  the  CCP  is  due  to  pay  out  €12  (€8  +  €4).  Meanwhile,  the  CCP  is  due  to 
receive €6 in variation margin from Member B. Of course, Member A is unable to meet 
its  payment  obligation  to  the  CCP  as  it  has  defaulted.  The  CCP  cannot  meet  these 
obligations in full and has a shortfall of €6 (€12 – €6). 

The  four  mechanisms  cover  the  shortfall  in  different  ways  and  have  different 
distributional effects. 

Cash call 
The CCP maintains solvency by requiring its members to pay it cash amounts which are 
in  aggregate  equal  to  the  shortfall  of  €6.  A  cash  call  offers  the  greatest  degree  of 
flexibility  in  the  way  that  losses  are  allocated.  The  amount  that  a  particular  individual 
member is required to pay to the CCP depends on the details of the rule but could, for 

124  This  is  a  stylised  example  for  illustrative  purposes  only  and  does  not  refer  to  the  resources  or 

procedures of any specific CCPs. 

 
 
 
                                                            
 
example,  be  proportional  to  that  member’s  initial  margin  requirement  or  default  fund 
contribution at the point of Member A’s default. 

Variation margin haircutting 
Under a variation margin haircutting loss-allocation rule, the CCP could haircut €8 that it 
is due to pay in variation margin. After the CCP has paid the €4 necessary to return to a 
matched book, it has €2 remaining of the €6 that it has received in variation margin. So 
the haircut on the variation margin that it owes is 75% (1 – 2⁄8), and if applied pro rata 
the CCP pays €0.5 to Member C and €1.5 to Member D. 

Complete tear-up 
Now  suppose  that  the  auction  establishes  a  more  extreme  price  at  which  members  will 
take on Member A’s positions of -€10 (i.e. the CCP must pay €10 to a member in order 
for that member to take on a position of -1 product x). Thus the CCP must pay out €10 in 
order to return to a matched book. So in total, the CCP is due to pay out €18 (€8 + €10).  

The CCP cannot meet these obligations in full, and cannot pay the auction price of  €10 
even with a 100% variation margin haircut (we assume that the CCP does not haircut the 
auction price). So the CCP tears up all open contracts at their mark-to-market mid-price 
valuations: it terminates all open contracts and is due to receive €6 from Member B, pay 
€2 to Member C and pay €6 to Member D. Since the payments due from the CCP (€8) 
exceed  the  payments  due  to  the  CCP  (€6),  the  payments  from  the  CCP  are  haircut  by 
25%, i.e. the CCP pays €1.5 to Member C and €4.5 to Member D. 

In this example the haircut imposed by the CCP is smaller  under complete tear-up than 
under  variation  margin  haircutting.  The  reason  for  this  is  that  in  the  case  of  complete 
tear-up, the CCP does not pay the auction premium. But after the complete tear-up, the 
members’ positions in product x and product y are no longer open; if the members wish 
to  re-establish  these  positions  they  will  need  to  enter  new  trades  to  do  so.  So  under 
complete tear-up, members’ potential losses from replacing their torn-up positions in the 
market  are  uncapped,  and  may  be  significant.  Replacing  the  contracts  may  also  entail 
operational costs and risks that a variation margin haircutting solution would avoid. 

Selective tear-up 
Faced with the same extreme price established in the auction of -€10, rather than tearing 
up all open contracts, the CCP tears up the smallest subset of contracts that will return it 
to  a  matched  book:  it  tears  up  Member  C’s  positions  in  +1  product  x  at  its  mark-to-
market mid-price valuation. 

As before, the CCP is due to receive €6 from Member B, pay €2 to Member C and pay 
€6 to Member D. Since the payments due from the CCP (€8) exceed the payments due to 
the CCP (€6), the payments from the CCP must be haircut.  

The CCP could haircut the tear-up price and variation margin equally, i.e. a 25% haircut 
so  that  the  CCP  pays  €1.5  to  Member  C  and  €4.5  to  Member  D  (this  differs  from 
complete tear-up in that Member D’s positions are not terminated). 

Alternatively,  the  CCP  could  compensate  Member  C  for  the  cost  of  replacing  its 
positions,  and  fund  this  compensation  by  making  the  variation  margin  haircut  greater 
than 25%. For example, the CCP could increase the variation margin haircut to 33% and 
pay €2 to Member C and €4 to Member D. 

104 

 
 
B) Table summarising CCP stakeholder impacts and corresponding preferences125  

Principal 
objective 

Recovery 

Resolution 

FSB - CPSS/IOSCO  CCPs 
in 
Continuity 
recovery;  resolution 
if 
necessary. 
Maintaining  critical 
ensuring 
services; 
financial stability. 

Continuity  in  recovery; 
resolution  if  necessary. 
Return 
viability 
to 
through own actions 

a 

degree 

exhaustion 

of 
Upon 
management 
default 
pre-
process.  Apply 
recovery  plan 
defined 
of 
with 
flexibility  to  deploy  the 
most  appropriate 
tools 
for 
prevailing 
circumstances 
After 
recovery process  

exhaustion 

of 

Comprehensive  and 
recovery 
effective 
activated 
plans, 
either 
upon 
exhaustion  of  default 
management  process 
or before if necessary 

After  exhaustion  of 
recovery  process,  or 
when 
recovery 
measures  would  be 
or 
insufficient 
damage 
financial 
stability 

avoid 

Clients 
Legal  and  operational 
certainty; 
that 
affected 
clients 
are 
economically. 
No 
recovery;  
prolonged 
swift  wind-down 
in 
resolution 
Should not seek recovery 
and  continuity;  default 
management  is  already 
  Achieve 
recovery. 
no 
swiftly; 
certainty 
margin haircutting 
(for  profit  CCPs  should 
not  be  bailed  out  by 
clients) 
After 
exhaustion 
default management 

of 

Clearing members 
Continuity  in  recovery; 
resolution  if  necessary. 
Legal  and  operational 
certainty;  and  continual 
critical 
to 
access 
services. 

EP 
Continuity  in  recovery; 
resolution  if  necessary. 
Maintaining 
critical 
services;  and  ensuring 
financial stability. 

As  final  step  in  default 
management.  Return  to 
viability  with 
least 
interventionist  measures; 
tools 
allocation 
loss 
should  be 
transparent, 
controllable,  measurable 
and manageable 

Comprehensive 
and 
recovery 
substantive 
plans,  esp.  for  products 
mandatory 
under 
reviewed  by 
clearing, 
authorities; 
authorities 
should be able to request 
changes; protect clients.  

exhaustion 

After 
of 
recovery  process  e.g. 
when 
auction  within 
default management fails 

After 
recovery process 

exhaustion 

of 

allocation 

Loss 
tools 
- Cash calls 

CPSS/IOSCO:  Yes;  Yes 

Yes 

Yes,  but 

limited  cash  Yes 

125  This table is a simplification of stakeholder views to further illustrate the narrative in sections 6.5-6.6 and in this annex. It is not a comprehensive representation of input received.   

 
 
 
 
 
 
 
 
 
                                                            
in 

resolution 
FSB: 
only  in  the  form  of 
non-
implementing 
recovery 
exhausted 
tools 
Yes 

legally 
not 

Where 
permitted 
insolvency-remote 
Yes 

or 

-  Variation  margin 
haircut (VMH) 

Initial  margin 

- 
haircut (IMH) 

- Tear-up 

and 
the 

- Forced allocation  Yes,    in  resolution 
aligned 
form  of 
non-
recovery 
first 
the 
where 

only 
with 
implementing 
exhausted 
tools 
in 
instances, 
possible 
Possibly,  notably  in 
non-default scenario  

-  More  skin-in-the-
game, bail-in 

Other tools 

calls  

Yes, 
compensation 

without 

Not  in  recovery,  only  in 
resolution 

No 

No 

Yes. Both temporary and 
partial & complete  

Yes. Rapid liquidation of 
all positions 

Yes 

n/a 

and 

last  step 

Yes,  as 
in 
recovery 
with 
compensation 
possible 
(shares  in  CCP  or  claim 
on defaulter’s estate) 
No 

within 

if  VMH 

Yes. Only complete tear-
affected 
up 
product 
is 
insufficient;  partial  only 
if  voluntary  so  as  to  not 
split up netting sets 
No,  so  as  not  to  disrupt 
netting sets 

Not  in  recovery,  only  in 
resolution, protect clients 
to the extent possible. 

n/a 

n/a 

n/a 

No 

Yes 

Yes,  especially  but  not 
non-default 
only 
scenario 

in 

in 

Yes, 
scenario 

non-default 

106 

 
 
 
 
 
 
 
-  Transfer  to  third 
party 
 -  Moratorium  on 
payments  due  by 
the 
to 
FMI 
participants/ 
linked FMIs 
the 
-  Stay  on 
exercise  of  early 
termination rights 
- 
outstanding 
contracts 
No 
worse-off 

creditor 

Enforce 

Yes 

Unlikely to work 

Unrealistic 

Yes, but difficult 

if 

Only 
it  doesn’t 
affect core functions 

Counter-productive 

No 

No 

subject 

Yes, 
certain conditions 

to 

Counter-productive 

Yes 

As last resort 

Yes 

Yes 

Yes 

Yes 

on 

Based 
full 
application  of  CCP 
loss allocation rules 

Responsibility 
authority  

of 

Responsibility 
of 
authority.    No  use  of 
segregated  client  funds; 
VMH  in  recovery  pre-
empts insolvency.  

Based on full application 
of  CCP  loss  allocation 
rules.  No  geographic 
discrimination.    Possible 
compensation 
through 
equity  or  other  asset  in 
resolved CCP.  

Yes 

n/a 

Yes 

Yes 

n/a 

107 

 
 
  
ANNEX XII – OTHER OPTIONS NOT CONSIDERED IN THIS IMPACT ASSESSMENT 

1) Choice of legal instrument 

In order to achieve the objectives, it is necessary to assess the best options to ensure that 
CCPs are equipped with adequate recovery tools that efficiently address extreme events 
exceeding  their  existing  risk  management  framework.  This  includes  tools  that  can  be 
used  to  mitigate  extreme  credit  risks  that  exceed  their  default  waterfall  as  set  out  in 
EMIR.  This  also  includes  appropriate  tools  to  address  extreme  business,  operational, 
investment or liquidity risks.  

It is also necessary to assess how necessary resolution powers would best be conferred on 
a public authority to ensure the required speed of action in case of CCP failure, and for 
example to either implement recovery tools  that have  not  been  implemented yet  by the 
CCP or to implement other appropriate tools.  

1. Adoption of soft law instruments or self-regulation by CCPs. 

2. Application of the bank recovery and resolution directive to CCPs. 

3.  Development  of  a  specific  legal  regime  applicable  to  CCPs,  covering 
recovery, early intervention and resolution based on international standards. 

Adoption of soft-law instruments or self-regulation by CCPs 

This  option  would  entail  the  adoption  of  specific  non-binding  industry  standards  to  be 
implemented on a voluntary basis by CCPs, or the adoption of an EU Communication or 
Recommendation  on  recovery  and  resolution  of  CCPs.  This  option  would  be  very 
flexible and allow the necessary arrangements to be designed to a large degree by mutual 
consent  of  CCP-users.  However,  it  may  not  provide  for  sufficient  legal  certainty  and 
decisive  tools  to  ensure  the  efficient  recovery  and  resolution  in  all  circumstances.  As 
recovery  and  resolution  tools  are  implemented  in  an  insolvency  or  near-insolvency 
context, ensuring the enforceability of these tools against the applicable insolvency law is 
of paramount importance. It is doubtful whether such legal certainty can be ensured by a 
self-regulatory approach. A binding action at the EU level would dovetail better with the 
need  to  harmonise  a  number  of  important  areas  of  law.  Only  a  binding  legislative 
instrument would guarantee that the options are introduced in all Member States and that 
the rules would be sufficiently homogenous and enforceable. 

Application to CCPs of the bank recovery and resolution directive 

The  directive  on  bank  recovery  and  resolution  agreed  by  the  European  Parliament  and 
Council  requires  banks  and  investment  firms  subject  to  its  scope  to  inter  alia  prepare 
recovery and resolution plans and equips authorities, when necessary, to engage in early 
intervention  and  resolution  measures  to  restructure  failing  banks  and  investment  firms. 
Some EU  CCPs  and  CSDs with  banking  licenses would fall within its scope.  However 
bank  resolution  rules  arguably  do  not  comprehensively  address  the  specific  features  of 
these  entities.  In  particular,  due  to  the  characteristics  of  CCPs  and  the  functions  they 
fulfil in financial markets, as described above and raised by a number of stakeholders in 
response to the public consultation126, the application of the bank resolution directive to 
CCPs  facing  severe  economic  difficulties  would  run  the  risk  of  not  being  the  most 
effective  way  to  achieve,  or  even  allow,  an  orderly  restructuring  of  the  CCP  and  the 

126  http://ec.europa.eu/internal_market/consultations/2012/nonbanks_en.htm    

108 

 
 
 
 
 
                                                            
maintenance  of  the  critical  services  it  provides.  In  particular,  the  bank  resolution 
approach does not take full account of the specific structure of CCP financial resources 
that  mainly  rely  on  the  CCP  default  waterfall;  consequently  the  application  of  the 
banking  framework  could  fail  to  ensure  an  efficient  coordination  between  the  default 
management  tools  of  a  CCP  –i.e.  its  default  waterfall  and  specific  recovery  and 
resolution tools. 

Adoption of a specific recovery and resolution framework for CCPs 

This policy option would consist in the development of specific recovery and resolution 
mechanisms  applicable  to  CCPs,  taking  into  account  their  specific  features  and  nature, 
covering  recovery,  early  intervention  and  resolution.  These  would  be  to  a  large  extent 
based on the internationally developed standards at the G20 level by the standard-setting 
bodies  such  as  CPSS-IOSCO  and  the  Financial  Stability  Board.  Recovery  measures 
would allow CCPs to address the threats to their economic viability and restore it by their 
own means, thus preventing their entry into resolution. In particular,  CCPs should have 
recovery tools that allow them to fully allocate any uncovered losses and recoup liquidity 
shortfalls,  to  re-establish  their  matched  book  and  to  restore  the  minimum  capital  and 
financial resources required by the applicable regulation (set out by EMIR in the EU). In 
order to do so, the CCPs' direct and indirect participants, owners and shareholders would 
be  exposed  to  losses  to  the  extent  specified  in  rules  and  agreements  provided  ex-ante, 
determining the application of one or several recovery tools. These could encompass for 
example supplementary default fund contributions, variation margin haircuts, cash calls 
on participants, allocation of unmatched contracts, etc. 

In particular, CCPs would be required to adopt their recovery plans which would permit 
adding  an  additional  financing  layer  if  necessary  to  the  default  waterfall  under  EMIR. 
The  recovery  plans  would  also  have  to    include  the  following:  (i)  identification  of  the 
critical  services;  (ii)  identification  of  stress  scenarios;  (iii)  identification  of  the  criteria, 
both quantitative and qualitative, which could trigger the implementation of all or part of 
the  recovery  plan;  (v)  identification  of  the  recovery  tools  and  the  tools  to  address 
structural  weaknesses.  Further,  CCPs  would  be  subject  to  resolvability  assessments  by 
authorities.  The  latter  would  be  in  charge  of  ensuring  up-to-date  resolution  plans  for 
CCPs. 

Resolution  should  be  initiated  once  a  CCP  is  no  longer  viable,  and  has  no  reasonable 
prospect  of  sustaining  or  recovering  viability  through  internal  arrangements  or  other 
private sector alternatives. Suitable indicators of non-viability should guide the decision 
of the resolution authorities as to whether institutions meet the conditions for entry into 
resolution.  

The resolution regime should be subject to the “no creditor worse off than in liquidation” 
safeguard. For legal certainty reasons, the starting point for measuring which losses are 
imposed in resolution should be based, as far as practical, on the CCP's ex-ante rules and 
procedures for loss allocation. 

The  resolution  powers  in  respect  of  a  CCP  should  be  determined  by  the  objective  to 
continue the CCP's critical functions either by transfer to another entity or in the existing 
franchise,  relying  on  its  capital  structure,  default  resources  and  loss  allocation 
arrangements to the maximum extent possible thus avoiding recourse to public funds and 
potential  losses  for  taxpayers.  They  should  take  into  account  the  CCP's  risk  profile, 
including, inter alia, its exposure to credit, liquidity, type and number of products cleared 
and  general  business  and  operational  risks.  Impacts  on  other  participants  in  the  CCP, 

109 

 
 
interconnectedness  with  other  CCPs,  FMIs  and  other  stakeholders  (regardless  of  where 
they are located) and on financial markets more widely should also be considered.  

2)  Policies to foster efficient cooperation of authorities in cross border resolution 

Cooperation between authorities responsible for CCP resolution in cross-border scenarios 
is vital. However, for the purpose of this impact assessment the question of which cross-
border  institutional  set-up  best  serves  efficient  resolution  is  secondary  to  the  primary 
policy imperative of how to ensure that efficient resolution is possible in the first place, 
and  what  the  relative  economic  impacts  of  the  options  to  achieve  this  would  be. 
Consequently,  questions  of  whether  relevant  resolution  authorities  should  constitute 
permanent  resolution  colleges  and  what  the  respective  powers  of  home  and  host 
authorities in the colleges should be are not considered in-depth here.    

3) Central EU-level supervision and resolution of CCPs 

The  option  of  transferring  the  oversight  and  notably  the  responsibility  to  carry  out  the 
resolution  of  CCPs  to  the  EU-level  was  raised  in  the  public  consultation.  Very  few 
stakeholders  considered  this  a  necessary  step  at  this  stage.  Indeed,  some  of  the  acute 
reasons why this has been necessary in the area of banking (‘Banking Union’) notably in 
the Euro Area are not as manifest in relation to non-bank entities including CCPs. While 
critical  for  financial  markets  and  the  overall  economy,  CCPs  play  a  less  direct  and 
prominent role compared to banks in providing funding and day-to-day financial services 
to households and businesses in Europe. As set out, they are also less likely than banks to 
fail precipitously and cause panic among counterparties and the wider public. As a result, 
they are less intertwined with the state notably in terms of the market perception of these 
institutions  benefitting  from  an  implicit  state  guarantee.  The  recent  fragmentation 
between Member States in the business conditions for banks to fund themselves and to 
support onward lending to the real economy which has arisen due to weaknesses in the 
banking sector, the fiscal position of the respective state, or both is not nearly as evident 
in the case of CCPs. The transmission of monetary policy, which depends on the services 
of  various  non-banks  such  as  CCPs  as  well  as  banks,  has  suffered  as  a  result  of  this 
fragmentation in the banking area, but not ostensibly as a result of problems in the non-
bank  area.  However,  with  the  growth  of  non-bank  channels  in  providing  alternative 
funding means to the economy, this is an area in which developments should continue to 
be monitored closely. 

4)  The  establishment  of  an  institutional  process  to  designate  institutions  operating 
in the EU as systemic 

An  option  which  has  been  raised  is  to  develop  a  system  similar  to  the  one  created  by 
Dodd-Frank in the US for identifying systemic non-bank institutions and for carrying out 
their  potential  resolution.  This  would  entail empowering  a systemic  risk-council  with  a 
membership drawn from the different sectoral regulators and central banks, such as the 
European  Systemic  Risk  Board  (ESRB),  to  designate  specific  non-bank  institutions  as 
systemic.  These  institutions  would  then  become  subject  to  heightened  regulatory  and 
supervisory  requirements,  including  the  obligation  to  draw  up  recovery  plans.  The 
process of designation would be based on mostly objective and quantitative criteria, but 
allowing  for  a  degree  of  supervisory  discretion,  and  providing  potential  designees  with 
the possibility to challenge the council’s assessment at various junctures. The resolution 
planning and the potential resolution of those institutions finally designated as systemic 
would  be  carried  out  by  an  authority  mandated  with  the  task,  possibly  the  Single 
Resolution  Board.  This  authority  would  ideally  have  access  to  mutualised  funds  either 

110 

 
 
set-up collectively ex-ante by systemic non-bank institutions or via a credit line from a 
fiscal backstop, to be reimbursed from ex-post assessments on the industry.  

The benefit of this system would be the establishment of a clear, transparent procedure to 
designate an institution as systemic and consider the systemic risks of various non-bank 
institutions,  as  well  as  a  clear  appeals  procedure.  Grouping  various  sectoral  regulators 
and  central  banks  into  the  process  would  enable  a  horizontal  assessment  of  systemic 
risks.  Institutions  from  different  non-bank  sectors  that  have  comparable  degrees  of 
systemic  relevance  would  be  subject  to  heightened  and  corresponding  regulatory 
requirements and supervisory scrutiny. Their potential resolution would be conducted by 
a  single  authority  charged  with  the  task,  thereby  ensuring  resolution  capability  and 
expertise, as well as mitigating concerns regarding the effects of a systemic institution's 
disorderly  failure.  Finally,  the  availability  of  pre-committed  resolution  funding  sources 
for the authority would ensure medium-term funding to help the critical functions of the 
resolved entity regain market viability and confidence.        

However, the system would also represent some notable challenges and drawbacks. First, 
the relevant market for assessing institutions’ systemic relevance, whether in relation to 
the EU or the national level, would have to be determined. Second, this choice would be 
key in  determining which non-bank institutions to  scrutinise more closely based on the 
size of their balance sheet. Third, a relatively precise, forward-looking and objective set 
of indicators and drivers based on, for example, an institution's size, interconnectedness, 
substitutability, complexity, cross-border activity, etc. would need to be designed setting 
out when and where systemic risk is and may in the future be present and how it could be 
transmitted to other actors. Fourth, if systemic relevance is measured at the EU-level, the 
institutional  arrangements  for  ensuring  heightened  supervision,  resolution  and  possible 
resolution  funding  would  need  to  be  developed,  with  potentially  significant  legal  and 
economic challenges. Fifth, given the political difficulty in applying these arrangements 
beyond  the  Euro  Area,  careful  thought  would  need  to  go  into  whether  the  necessary 
coordination  mechanisms  between  these  arrangements  and  non-Euro  Area  Member 
States could rely on those of existing legislation (EMIR, CSDR, Solvency II, BRRD etc.) 
or would need different structures. Finally, a system of designations at EU-level should 
still allow national authorities to make corresponding assessments for entities which are 
systemic in their own markets, and a coordination mechanism to ensure the coherence of 
these designations with the internal market should be developed.         

5) State ownership of CCPs 

A  CCP’s  creditworthiness  and  continued  ability  to  price,  collateralise  and  clear  trades 
needs to be of the highest standard. It has been suggested that to secure this beyond any 
doubt  at  all  times  and  to  avoid  its  members  from  second-guessing  the  safety  of  their 
positions with the CCP, and withdrawing from using its services in a destabilising way, 
CCPs could be made non-profit agencies of the state127. However, this option runs into 
several difficulties. First, as entities active across borders, the public ownership of CCPs 
would  often  have  to  be  transnational.  The  difficulty  of  agreeing  on  cross-border  fiscal 
burden-sharing  of  this  type  has  been  vividly  illustrated  by  the  crisis.  Whether  the  EU 
Treaties  would  allow  making  a  proposal  with  such  national  and  cross-border  fiscal 
consequences  would  need  careful  study.  Second,  public  ownership  is  not  necessarily  a 

127  Paul  Tucker;  “Are  clearing houses  the  new  central banks?”  Over-the  counter  derivatives  symposium, 
2014; 

Chicago, 
http://www.chicagofed.org/digital_assets/others/events/2014/annual_over_the_counter_derivatives_sy
mposium/tucker_clearinghouses_new_central_banks_tucker_2014.pdf  

April 

111 

 
 
                                                            
guarantee of better management of risks. Indeed, in some cases explicit state support can 
decrease standards and act as a disincentive to proper monitoring of risks by participants. 
Third,  CCP-liabilities  are  between  market  professionals  who,  in  return  for  the  benefit 
derived from central clearing, should be incentivised to assume the risks of participating 
in the system.        

6) CCP access to central bank liquidity 

The question of whether a central bank should, as lender of last resort,  extend liquidity 
assistance, either through routine liquidity provision tools or through emergency liquidity 
assistance,  to  CCPs  that  experience  major  financial  difficulties  is  periodically  debated. 
CCPs occupy a central position in the financial system and they can experience liquidity 
problems comparable to those of banks. Failure to extend central bank liquidity support 
to  CCPs  may  lead  to  financial  instability  of  the  kind  which  central  banks  could,  in 
relation  to  banks,  typically  seek  to  alleviate  via the  use  of  lender  of  last  resort  powers. 
However, if the markets were to consider that a CCP had the implicit backing of a central 
bank,  this  would  present  a  moral  hazard  concern  (cf.  experience  with  banks  in  their 
capacity  as  deposit-takers,  providers  of  credit  and  operators  of  payment  systems  in  the 
lead  up  to  and  during  the  recent  crisis  affecting  financial  markets).  A  combination  of 
rigorous  prudential  requirements  and  oversight,  and  the  implementation  of  appropriate 
recovery and resolution tools could possibly help mitigate such moral hazard concerns.  

112