COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE 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

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   EN 

   EUROPEAN COMMISSION  Brussels, 28.11.2016  SWD(2016) 369 final   COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE 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) 368 final}  
 
 
Executive Summary Sheet 
Impact  assessment  on  a  proposal  for  a  framework  to  ensure  the  orderly  recovery  and  resolution  of  central 
counterparties (CCPs)    

A. Need for action 

Why? What is the problem being addressed?  
The failure of a financial institution has the potential to create contagion to other institutions in particular where 
normal  insolvency  proceedings pose such  a  threat  to  the stability  of  the  financial  system  as  a  whole.  In  these 
cases,  the  State  may  be  compelled  to  rescue  the  institution  using  taxpayers’  money,  as  State  inaction  could 
result in a systemic crisis and imply huge losses for the economy. State intervention has recently been required, 
at  a  cost  to  the  taxpayer,  to  rescue  many  banks  so  as  to  dampen  such  a  systemic  crisis.  In  response,  EU 
prudential  regulation  for  banks  was  strengthened  considerably  and,  importantly,  a  new  framework  –  the  Bank 
Recovery and Resolution Directive (BRRD) – empowering relevant authorities to ensure the orderly failure of a 
bank was established. It requires banks to prepare more effectively for managing financial distress, provides the 
competent  authorities  with  powers  for  early  intervention  in  a  bank  that  is  failing  or  likely  to  fail,  establishes  a 
common set of resolution tools for managing failure and allocates any financial losses among stakeholders in the 
bank. The BRRD, thus, facilitates the restructuring of a bank by public authorities that is failing or likely to fail, 
while minimising any cost for taxpayers. 

A  central counterparty  (CCP)  intervenes  between  counterparties  to  financial  transactions  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. While CCPs are less vulnerable to failure compared to banks, they are not immune. There is an 
international  consensus  that  systemic  financial  risks  in  all  financial  institutions,  and  not  just  banks,  should  be 
carefully monitored and addressed.1 The recent crisis has shown that any public intervention to address risks in 
financial institutions should be swift and with minimum recourse to taxpayer funds. It is widely acknowledged that 
an EU-wide recovery and resolution framework is most urgently required for CCPs. The Financial Stability Board 
(FSB), a top-level international grouping of regulators working under the aegis of the G20 to reform the financial 
regulatory landscape in the wake of the crisis and to address emerging risks, has also prioritised this work. The 
business model of CCPs implies a significant concentration of financial risk, primarily from banks as their largest 
users, but also by other financial actors. It  is inherently cross-border within an integrated EU and global market. 
Moreover, the systemic significance of CCPs is certain to increase further due to the G20-commitment to clear 
over-the-counter (OTC) derivatives via CCPs, transferring risks inherent in these instruments away from banks 
and concentrating them on CCPs and ensuring their centralised risk management. While being a low-probability 
event,  the  failure  of  a  CCP  could,  via  its  central  position  in  the  markets  and  notably  its  direct  links  to  banks, 
cause  widespread  contagion  within  the  financial  system  if  not  managed  in  an  orderly  manner.  Accordingly,  a 
legislative  framework  is  required  that  empowers  relevant  authorities  to  address  this  financial-stability  risk  by 
rapidly restructuring and winding-up the operations of a CCP in an orderly way in case of threatened systemic 
failure.  In  addition,  legislative  measures  should  provide  incentives  for  sound  risk  management  of  CCPs  and 
protect the clients of the large banks which use the CCPs clearing services, and taxpayers from large losses in 
the event of resolution.  

What is this initiative expected to achieve?  
The new legislation would ensure that CCPs are better prepared to recover from financial distress and provide  
appropriate authorities with new powers to rapidly recover or resolve CCPs, which are failing or likely to fail, so 
as  to  preserve  their  critical  functions  while  winding  up  other  operations.  While  EU  Regulation  governing  the 
functioning  of  CCPs2  already  brings  major  improvements  to  the  prudential  management,  this  initiative  would 
contribute to further enhancing financial stability by designing and harmonising crisis-prevention and resolution 
tools  across  the  EU.  The  specificity  of  CCPs  and  the  existing  regulatory  framework  will  be  duly  taken  into 
account when designing such tools so as to avoid duplication and ensure proportionality. 

What is the value added of action at the EU level?  
EU  financial  markets  are  highly  integrated.  Authorised  CCPs  provide  their  services  across  borders  and, 
accordingly, the failure of a CCP would imply spillover effects between Member States. The fragmentation of the 
EU  Single  Market  during  the  recent  crisis  clearly  demonstrates  the  danger  of  relying  exclusively  on  divergent 
national  regimes  to  manage  the  failure  of  financial  institutions  with  cross-border reach.  Therefore,  a  European 
framework for recovery and resolution of CCPs would ensure more effective crisis management and less market 

1  See  e.g.  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  
2 Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (“EMIR”).   

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fragmentation. It would foster a coordinated execution of actions across Member States, a level playing-field for 
the  institutions  concerned  and  an  equal  treatment  of  their  owners,  creditors  and  customers.  In  this  way,  the 
existing EU and national prudential rules would also be enhanced by the EU recovery and resolution framework.  

B. Solutions 
What  legislative  and  non-legislative  policy  options  have  been  considered?  Is  there  a  preferred 
choice or not? Why?  
A  recovery  and  resolution  framework  for  CCPs  is  likely  to  involve  a  public  authority  taking  extraordinary 
measures  in  the  public  interest,  possibly  overriding  normal  property  rights  and  allocating  losses  to  specific 
stakeholders. Accordingly, legislative policy options are preferred to possible “soft-law” measures.   

Who supports which option?  
Based  on  stakeholder  feedback  obtained  through  a  Commission  public  consultation  and  international 
discussions  under  the  aegis  of  the  FSB,  there  is  widespread  consensus  within  the    industry  and  amongst 
authorities  that  all  CCPs  should  be  subject  to  a  framework  that  enables  their  orderly  recovery  and  potential 
resolution  in  the  event  of  serious  financial  distress.  However, stakeholders have  diverging  preferences among 
the different loss-allocation options (6.6), depending on how they would be affected.  

C. Impacts of the preferred option 
What are the benefits of the preferred option (if any, otherwise main ones)?                                       
In  contrast  to  the  banking  sector,  CCPs  did  not  experience  major  problems  during  the  recent  crisis. 
Consequently,  there  is  less  empirical  evidence  with  which  to  quantify  the  benefits  of  an  EU  recovery  and 
resolution  framework  for  CCPs.  However,  the  cross-border  operations  and  risk  concentration  of  larger  CCPs 
suggest that the implications of a disorderly failure for financial stability could be even greater than in the case of 
a systemically-important bank. Moreover, the risk concentration in CCPs is set to increase substantially due to 
the G20 commitment to mitigate risks for market participants in bilateral derivative transactions by requiring them 
to clear standardised transactions through CCPs. Better crisis planning within CCPs and powers for authorities 
to  intervene  with  standardised  tools  should  reduce  the  risk  of  a  catastrophic  failure  of  a  CCP,  which  would 
otherwise almost certainly necessitate a rescue by the State at considerable cost to the taxpayer. The prospect 
of  more  orderly  CCP  recovery  and  resolution  is  likely  to  benefit  the  financial  sector  more  generally,  by 
incentivising better risk management within the CCP and of bank exposures to the CCP.  

What are the costs of the preferred option (if any, otherwise main ones)?                                       
The upfront costs for CCPs will primarily be in the shape of requirements for better planning and prevention of 
failure.  These  will  vary  depending  on  the  size,  interconnectedness,  substitutability  and  complexity  of  the  CCP 
and  include  human  resource  costs,  applicable  consulting  and  legal  fees,  systems  upgrades  and  possible 
reorganisation costs. Based on the corresponding costs for banks, these requirements are estimated to be in the 
millions for the largest institutions and in the thousands for smaller entities. On aggregate, the smaller number of 
CCPs subject to these requirements and their lower level of organisational complexity compared to banks should 
entail  overall  lower  upfront  costs.  As  part  of  assessing  and  facilitating  CCPs’  resolvability,  authorities  could 
require some of them to strengthen their balance sheet or streamline their organisational structures, but these 
would be ad hoc cases and not apply to the whole sector.   
How will businesses, SMEs and micro-enterprises be affected?  
All  EU  CCPs  are  in  the  scope  of  this  impact  assessment.  In  terms  of  indirect  net  impacts,  SMEs  and  other 
businesses are expected to benefit from an overall reinforcement of financial stability.  
Will there be significant impacts on national budgets and administrations?  
One of the main objectives of the proposed measures is to spare national budgets from the costs of providing 
solvency support in the event of failure of a CCP.   
Will there be other significant impacts?   
It might be necessary for the competent authorities to take extraordinary measures in the public interest so as to 
avert a threat of financial panic in the event that a CCP is failing or likely to fail. Such extraordinary measures 
could  override  established  property  rights.  However,  any  such  measures  must  comply  with  the  European 
Convention of Human Rights  and so be proportionate, seek to preserve value in the overall interest and leave 
affected stakeholders in a position no worse than if the CCP had gone into insolvency proceedings.   

When will the policy be reviewed?   
CCPs should monitor their recovery plans and authorities their preferred resolution options so as to ensure that 
they are appropriate on an on-going basis and in light of any changes to the CCPs' situation and wider market 
developments. The framework as a whole could be subject to review after a 3-5 year period.  

D. Follow up 

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