REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the treatment of central counterparty equity in the write-down and conversion tool under Regulation (EU) 2021/23
Date: 2022-08-10
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, 10.8.2022  COM(2022) 393 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the treatment of central counterparty equity in the write-down and conversion tool under Regulation (EU) 2021/23   
 
 
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

on the treatment of central counterparty equity in the write-down and conversion tool 
under Regulation (EU) 2021/23 

1.  Introduction 

The fourth  subparagraph of  Article 96 of Regulation (EU) 2021/23  on a  framework for the 
recovery and resolution of central counterparties1 (CCP-RRR) mandates the Commission to 
report by 31 December 2021 to the European Parliament and the Council on the application 
of Article 27(7) of the CCP-RRR. The Commission is asked to assess whether there is a need 
for any further amendments with regard to the application of the write-down and conversion 
tool  in  the  event  of  resolution  of  central  counterparty  (CCPs)  in  combination  with  other 
resolution  tools  that  result  in  financial  losses  being  borne  by  clearing  members.  Recent 
market  turmoil  has  demonstrated  that  Regulation  (EU)  No  648/2012  on  OTC2  derivatives, 
central  counterparties  and  trade  repositories3  (EMIR)  has  contributed  to  the  increased 
resilience  of  CCPs  and  wider  financial  markets  against  the  many  risks  processed  and 
concentrated  in  CCPs.  However,  in  light  of  the  severe  impact  on  financial  stability  that  a 
financial  distress  or  a  failure  of  a  CCP  would  have,  the  CCP-RRR  will  increase  the 
preparedness of CCPs and public authorities for such extreme scenarios.  

takes 

report 

the 
This 
Financial Stability Board (FSB)  and  input  from  Crisis  Management  Group  members  of  EU 
CCPs. Positions from industry stakeholders are also considered in the assessment. 

the  completed  and  ongoing  work  of 

account 

into 

2.  What are the resolution tools? 

The write-down and conversion tool is one of the four resolution tools offered by the CCP-
RRR to  resolution  authorities to  ensure that resolution  objectives are met. These objectives 
include:  

- 

ensuring the continuity of the CCP’s critical functions and links with other financial 
market infrastructures;  
avoiding a significant adverse effect on the EU financial system;  

- 
-  protecting  public  funds  by  minimising  reliance  on  extraordinary  public  financial 

support and the potential risk of losses for taxpayers. 

The other three resolution tools are the position and loss allocation tools, the sale of business 
tool and the bridge CCP tool.  

The position and loss allocation tools can be used to terminate contracts, reduce the value of 
any gains payable by the CCP to non-defaulting clearing members, and make resolution cash 
calls. Cash calls require non-defaulting clearing members to make a cash contribution to the 
CCP. 

1 OJ L 22, 22.1.2021, p. 1. 
2 Over-the-counter derivatives as defined in Article 2(7) of Regulation (EU) No 648/2012 
3 OJ L 201, 27.7.2012, p. 1. 

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The sale of business tool can be used to transfer instruments of ownership issued by a CCP or 
any assets, rights obligation or liabilities of the CCP, without the consent of shareholders or 
any third party to a purchaser. 

The bridge CCP tool can be used to transfer instruments of ownership issued by a CCP or any 
assets,  rights  obligation  or  liabilities  of  the  CCP  to  a  bridge  CCP,  without  the  consent  of 
shareholders or any third party. A bridge CCP is a legal person controlled by the resolution 
authority and wholly or partially owned by a public authority. 

The write-down  and conversion tool  can be  used  to  write down and convert instruments  of 
ownership,  debt  instruments  and  other  unsecured  liabilities.  Certain  liabilities  are  excluded 
from the scope of this tool, including those to employees, commercial or trade creditors, other 
CCPs, central banks, and initial margins. 

The  write-down  leads  to  the  absorption  of  losses  incurred  by  the  CCP,  and  the  conversion 
then  recapitalises  the  CCP.  This  ensures  that  the  capital  requirements  –  according  to 
Regulation  (EU)  No  648/2012  on  OTC  derivatives,  central  counterparties  and  trade 
repositories (EMIR) – are met again. 

3.  What is required under Article 27(7) of the CCP-RRR? 

Under Article 27(7) of the CCP-RRR, the resolution authority must write down and convert 
any  instruments  of  ownership,  debt  instruments  and  other  unsecured  liabilities  immediately 
before  or  together  with  the  application  of  another  resolution  tool.  This  is  not  required  if  a 
different sequence is applied that would minimise deviations from the ‘no creditor worse off’ 
(NCWO) principle and better achieve the resolution objectives. 

The  NCWO  principle  is  a  safeguard  provided  for  under  Article 60 of  the  CCP-RRR.  It 
ensures that shareholders, clearing members and other creditors do not incur greater losses in 
resolution  than  they  would  have  if  the  CCP  had  been  wound  up  under  normal  insolvency 
proceedings, following the full application of the applicable contractual obligations and other 
arrangements in its operating rules (the ‘NCWO counterfactual’). This is achieved thanks to 
an independent valuation that compares the actual treatment received in resolution with their 
hypothetical  treatment  in  insolvency.  If  this  valuation  shows  that  creditors  had  to  incur 
greater losses, they are entitled to a payment of the difference. The European Securities and 
Markets  Authority  is  currently  developing  regulatory  technical  standards  to  further  specify 
the methodology for carrying out the valuation. 

Recital 96 of the CCP-RRR explains that, in a resolution, CCP equity holders should absorb 
losses first in a way that minimises the risk of legal challenges under the NCWO principle. 
Referring to ongoing work in the international standard-setting bodies (see in Section 4), the 
European Parliament and the Council asked the Commission to review how the rules on the 
write-down of equity are applied following the conclusion of that work. 

The  scope  of  this  report  is  therefore  the  treatment  of  CCP  equity  in  resolution  and  its 
interaction  with  the  NCWO  counterfactual.  Article  27(7)  of  the  CCP-RRR  presumes  that 
CCP equity should absorb losses first and be fully loss absorbing in resolution. However, the 
order/waterfall for imposing losses is not necessarily in line with the usual creditor hierarchy 

2 

 
 
in insolvency. The reason is that equity is only exposed to losses up to the amount of the first 
skin  in  the  game4  (Article  45(4)  of  the  EMIR  and Article 35 of Commission  Delegated 
Regulation (EU) No 153/20135) and, in future, the second skin in the game (Article 9(14) of 
the CCP-RRR). All remaining losses are to be allocated to clearing members. This is the case 
following a default event and, in some CCPs and to a limited extent, a non-default event. In 
addition,  the  NCWO  counterfactual  in  the  CCP-RRR  includes  the  full  application  of  the 
contractual  obligations  and  other  arrangements  in  the  CCP’s  operating  rules  for  valuation 
purposes.  Therefore,  depending  on  whether  and  how  equity  absorbs  losses  in  a  CCP’s 
operating rules and on national insolvency law, this mechanism can lead to a situation where 
shareholders can claim that they would not have been affected outside resolution. This could 
in particular be the case if the CCP was put into resolution before the full application of the 
recovery plan to achieve the resolution objectives. 

4.  Ongoing international work 

Practical experience with resolution planning in the EU remains limited, since the resolution 
planning rules of the CCP-RRR will only apply from August 2022. However, the Financial 
Stability  Board  (FSB)  has  published  guidance  documents  on  this  issue  (see  Section  4(a) 
below).  Private  stakeholder  and  cooperation  bodies  have  also  shared  their  views6.  These 
bodies  include  the  European  Association  of  CCP  Clearing  Houses  (EACH),  CCP12  (the 
global  association  for  CCPs)  and  the  International  Swaps  and  Derivatives  Association 
(ISDA).  

In addition, limited practical experience has been gained by members of Crisis Management 
Groups.  These  are  groups  set  up,  in  line  with  feature  8  of  the  FSB’s  Key  Attributes  of 
Effective  Resolution  Regimes  for  Financial  Institutions7,  for  CCPs  that  are  systemically 
important  in  more  than  one  jurisdiction.  The  Crisis  Management  Groups  are  tasked  with 
coordinating  resolution  planning  and  resolvability  assessments  between  home  and  host 
resolution authorities. 

a  Work by the FSB 

The  FSB  issued  its  updated  Key  Attributes  of  Effective  Resolution  Regimes  for  Financial 
Institutions  in  October  2014  by  expanding  it  with  an  annex  that  specifically  deals  with 
financial market infrastructures. In this report, the FSB states that resolution powers should 
be exercised in  a way that  respects  the hierarchy of claims and equity should absorb losses 
first in resolution8. 

4 The CCP’s dedicated own resources that it must use to absorb losses before using the default fund contributions 
of non-defaulting clearing members. 
5  Commission  delegated  Regulation 
(EU)  No  153/2013  of  19  December  2012  supplementing 
Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical 
standards on requirements for central counterparties, OJ L 52, 23.2.2013, p. 41. 
6 https://www.fsb.org/2020/08/public-responses-to-consultation-on-guidance-on-financial-resources-to-support-
ccp-resolution-and-on-the-treatment-of-ccp-equity-in-resolution/ 
7  Key  Attributes  of  Effective  Resolution  Regimes  for  Financial  Institutions,  FSB,  2014,  Key  Attributes  of 
Effective Resolution Regimes for Financial Institutions (fsb.org). 
8 Key Attributes of Effective Resolution Regimes for Financial Institutions, FSB, 2014, p. 11.  

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The  FSB  published  its  Guidance  on  Central  Counterparty  Resolution  and  Resolution 
Planning  in  20179.  In  this  report,  the  FSB  explains  that  owner’s  equity  in  the  CCP  should 
absorb losses in resolution if it has not been written down  yet (in line with the CCP’s rules 
and contractual arrangements). For default losses, equity should be fully loss absorbing and it 
should be clear and transparent at which point it will be written down. For non-default losses, 
equity  should  absorb  them  no  later  than  the  point  at  which  all  applicable  loss  allocation 
arrangements available under the CCP’s rules and arrangements for non-default losses have 
been  exhausted.  Moreover,  equity  should  be  written  down  before  losses  are  allocated  to 
creditors, in line with the creditor hierarchy under the applicable legislation10. 

The FSB issued its Guidance on Financial Resources to support CCP Resolution and on the 
Treatment  of  CCP  Equity  in  Resolution  in  November  202011.  The  report  clarifies  that, 
depending  on  the  CCP’s  contractual  arrangements  and  national  insolvency  law,  actions  in 
resolution that expose CCP equity to larger default or non-default losses than in liquidation 
under  the  insolvency  regime  applicable  in  the  jurisdiction  could,  based  on  the  treatment 
received  under  the  counterfactual,  enable  equity  holders  to  raise  NCWO  claims.  This  may 
lead to a result inconsistent with the other Key Attributes principle that equity should be fully 
loss absorbing in  resolution. This  may  also  raise moral  hazard concerns  by allowing equity 
holders to maintain their equity interest in a CCP after resolution while participants have to 
bear losses. 

Building upon the Key Attributes and the guidance mentioned above, the FSB specifies that 
the resolution authority should assess the impact that any limits on the amount of CCP equity 
exposed  to  losses  has  on  its  ability  to  take  appropriate  action  to  achieve  the  expected 
treatment of CCP equity. At the stage of resolution planning, the resolution authority should 
understand issues such as the following: 

- 

- 

the  treatment  of  equity  under  existing  recovery  arrangements  and  in  the  default 
waterfall; 
the  extent  to  which  equity  would  be  exposed  to  losses  in  liquidation  under  the 
applicable 
the 
counterfactual; 

insolvency  regime,  based  on 

treatment  received  under 

the 

-  NCWO safeguards, including potential claims by shareholders12.  

Based on this assessment, the resolution authority can identify various options to help ensure 
equity bears losses during an actual resolution, including: 

- 
- 
- 

changing contractual loss allocation arrangements; 
full or partial write-down of CCP equity; 
transferring  critical  CCP  operations  (assets)  and  certain  liabilities  to  a  bridge  entity 
and placing the remnant CCP into liquidation/receivership; 

9  Guidance  on  Central  Counterparty  Resolution  and  Resolution  Planning,  FSB,  2017,  Guidance  on  Central 
Counterparty Resolution and Resolution Planning (fsb.org). 
10 Guidance on Central Counterparty Resolution and Resolution Planning, FSB, 2017, p. 9. 
11  Guidance  on  Financial  Resources  to  Support  CCP  Resolution  and  on  the  Treatment  of  CCP  Equity  in 
Resolution, FSB, 16 November 2020, Guidance on Financial Resources to Support CCP Resolution and on the 
Treatment of CCP Equity in Resolution: Final Report (fsb.org). 
12  Guidance  on  Financial  Resources  to  Support  CCP  Resolution  and  on  the  Treatment  of  CCP  Equity  in 
Resolution, FSB, 2020, pp. 18-19. 

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-  diluting existing ownership by raising new capital through conversion or issuance of 

new shares13.   

The  relevant  authorities  should  then  address  the  challenges  relating  to  CCP  equity  fully 
bearing  losses  in  resolution.  This  may  include  the  authority  requiring  CCPs  to  amend  their 
capital  structures,  rules  or  other  governance  documents  in  a  manner  that  subordinates 
shareholders  to  other  creditors  or  sets  the  point  at  which  equity  absorbs  losses  in  legally 
enforceable terms, under the condition that home authorities have the relevant powers.  

The authority may also identify or propose changes to applicable national laws, regulations or 
powers of the relevant supervisory, oversight or resolution authorities that would  help meet 
the  resolution  objectives  or  limit  the  potential  for  NCWO  claims.  However,  if  the 
jurisdiction’s  framework  does  not  incorporate  such  changes,  the  relevant  authorities  may 
need to: 

- 
- 

- 

accept any limitations on CCP equity fully bearing losses; 
include  a  statement  in  the  resolvability  assessment  process  on  their  rationale  for 
accepting such limitations (which may include a lack of legal authority); 
identify alternatives to achieve as similar an economic outcome as possible to ensure 
that  equity  bears  losses  in  actual  resolution  (depending  on  the  applicable  national 
framework). 

Following  these  considerations,  the  FSB  recommends  that  the  resolution  authority  also 
analyse how this expected treatment of CCP equity could affect (among others): 

- 
- 
- 
- 

the CCP management incentives; 
stakeholders to support recovery and avoid resolution; 
clients;  
the CCP’s critical services, business models and legal structures14. 

In the consultation on the FSB’s Guidance on Financial Resources, CCP12 highlighted that 
adjusting  the  treatment  of  CCP  equity  in  line  with  the  guidance’s  recommendations  could 
undermine the incentive structure in place that promotes successful default management and 
recovery  processes15.  EACH  agreed  in  the  same  consultation  with  the  policy  objective  that 
the NCWO safeguard does not end up tying the hands of the resolution  authorities16. ISDA 
published a paper Safeguarding Clearing: The Need for a Comprehensive CCP Recovery and 
Resolution Framework in September 201717. In this report, ISDA states that the work on the 

13  Guidance  on  Financial  Resources  to  Support  CCP  Resolution  and  on  the  Treatment  of  CCP  Equity  in 
Resolution, FSB, 2020, pp. 19-20. 
14  Guidance  on  Financial  Resources  to  Support  CCP  Resolution  and  on  the  Treatment  of  CCP  Equity  in 
Resolution, FSB, 2020, pp. 21-22. 
15  CCP12  response  to  FSB  consultative  document  entitled  “Guidance  on  financial  resources  to  support  CCP 
resolution  and  on  the  treatment  of  CCP  equity  in  resolution”,  CCP12,  2020,  pp.  1-2,  Response  to  FSB 
Consultation on Guidance on financial resources to support CCP resolution and on the treatment of CCP equity 
in resolution. 
16  Response  to  FSB  Consultation  on  Guidance  on  financial  resources  to  support  CCP  resolution  and  on  the 
treatment  of  CCP  equity  in  resolution,  EACH,  2020,  p.  11,  Response  to  FSB  Consultation  on  Guidance  on 
financial resources to support CCP resolution and on the treatment of CCP equity in resolution. 
17  Safeguarding  Clearing:  The  Need  for  a  Comprehensive  CCP  Recovery  and  Resolution  Framework,  ISDA, 
2017, safeguarding-clearing-final.pdf (isda.org). 

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use of  equity in CCP resolution  is  still ongoing  and mentions some key  points to  consider. 
These  include  what  the  allocation  of  losses  to  equity  actually  means  under  the  applicable 
resolution  strategy  and  who  would  own  the  CCP  immediately  upon  the  write-down  of 
equity18. 

The FSB also published its 2021 Resolution Report’ in November 202119. It reports that from 
the  13  established  CMGs,  8  have  started,  but  not  completed,  discussing  the  treatment  of 
equity in recovery and liquidation in the identified hypothetical default loss scenarios and 7 in 
the identified hypothetical non-default loss scenarios. The report also explains that the FSB 
will  continue  to  gather  evidence  and  analyse  the  use,  composition  and  amount  of  CCP 
financial  resources  in  recovery  and  resolution  in  default  and  non-default  loss  scenarios.  By 
the end of 2022, the FSB will submit a status report20. 

b. 

Experience of members of Crisis Management Groups (CMGs) 

The  Commission  asked  EU  members  of  CMGs  to  provide  feedback  on  their  initial 
experiences with these issues. 

The  general  feedback  from  the  authorities  was  that  further  analysis  was  needed  and 
developments would be closely monitored when the CCP-RRR becomes fully applicable. The 
feedback for now is thus limited in scope and detail, and it may not capture all the relevant 
issues that may arise in future resolution planning. The points below were made. 

According to the EU members, the currently applicable insolvency framework does not make 
specific arrangements for CCPs. In addition, the default waterfall, for default losses, may not 
be aligned with the creditor hierarchy in resolution. To mitigate this issue, Article 62 of the 
CCP-RRR sets out that the full application of contractual obligations or other arrangements in 
CCP operating rules should be taken into account for calculating the NCWO counterfactual. 

The  preliminary  assessment  of  other  members  is  that  the  equity  seems  fully  absorbing 
without breaching NCWO safeguards or the risk of NCWO claims is limited since the value 
of  continued  services,  by  applying  resolution  tools,  is  estimated  to  be  higher  than  potential 
losses. The point was also made that resolution strategies that hinge on a strong involvement 
of clearing members seem particularly suitable to avoid breaking the NCWO counterfactual. 

It  was also  pointed out  that, as well as the  CCP-RRR that will be soon applicable, work in 
CMGs  on  this  topic  will  continue  in  2022  in  line  with  the  recommendations  made  in  the 
FSB 2021 Resolution Report21. 

18  Safeguarding  Clearing:  The  Need  for  a  Comprehensive  CCP  Recovery  and  Resolution  Framework,  ISDA, 
2017, p. 11. 
19 2021 Resolution Report, FSB, 2021, https://www.fsb.org/wp-content/uploads/P071221.pdf. 
20 2021 Resolution Report, FSB, 2021, p. 23. 
21 2021 Resolution Report, FSB, 2021, p. 23. 

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5.  The Commissions’s assessment 

To decide on possible amendments to the write-down and conversion tool and Article 27(7) 
CCP-RRR, the Commission has to take into account the following: 

- 

- 
- 

the treatment of equity in CCP’s current rules and contractual arrangements; 
the envisaged resolution strategy by resolution authorities set down in the preparatory 
resolution planning phase; 
the  practical  implementation  of  the  CCP  recovery  and  resolution  framework  by 
European CCP resolution colleges;  
the  upcoming  European  Securities  and  Markets  Authority  regulatory  technical 
standard on the valuation for applying the NCWO principle; 
-  ongoing work by the FSB and members of CMGs on this issue.  

- 

Resolution  authorities  have  not  yet  started  investigating  the  current  treatment  of  equity  in 
CCP’s  rules  and  contractual  arrangements  in  the  course  of  resolution  planning  because  the 
relevant  rules  of  the  CCP-RRR  only  become  applicable  in  August  2022.  The  European 
Securities  and  Markets  Authority  is  developing  the  regulatory  technical  standards  on 
valuation,  which  will  need  a  delegated  regulation  to  be  adopted  by  the  Commission.  The 
work by the FSB and members of CMGs is still ongoing and currently not sufficiently mature 
to give a definitive picture on this topic. 

The CCP-RRR allows EU resolution authorities to consider and explore all the FSB’s options 
described in the Guidance on Financial Resources for the treatment of equity, including: 

changing contractual loss arrangements;  
full or partial write-down of equity;  
transferring critical operations to a bridge entity;  

- 
- 
- 
-  diluting existing ownership.  

This allows the responsible resolution authorities, in coordination with the resolution college, 
to cater to the specific needs of the individual CCP during resolution planning as well as the 
individual crisis case when carrying out a resolution. Following this, there are no barriers in 
the CCP-RRR to allow an appropriate treatment of CCP equity in resolution. 

However, more work is  needed to  ensure that the principle  of CCP equity  absorbing losses 
first and being fully loss absorbing in resolution can be applied. Due to the limited practical 
experience  gained  and  ongoing  policy  work,  the  Commission  cannot  conclude  if  an 
amendment of Article 27(7) CCP-RRR is necessary at this time.  

6. 

Conclusion. 

In the CCP-RRR, the European Parliament and the Council tasked the Commission to report 
on the application of the write-down and conversion tool. In particular, the Commission had 
to determine whether there was a need for any further amendments on the application of the 
write-down  and  conversion  tool  in  a  CCP  resolution,  in  combination  with  other  resolution 
tools  that  result  in  financial  losses  being  borne  by  clearing  members.  The  CCP-RRR  gives 
EU resolution  authorities the tools to  reflect on the issues raised in the FSB’s  Guidance on 
Financial Resources and thus does not limit policy choices. However, since technical work is 
still ongoing and practical experience is limited, no recommendation to amend Article 27(7) 
CCP-RRR can be made at this time. 

7 

 
 
There is however a need to clarify these issues to ensure the legal robustness of the EU CCP 
recovery and resolution regime. Further work on this issue will enable a more comprehensive 
and  well-rounded  assessment.  The  conclusions  should  be  shared  with  the  European 
Parliament and the Council as soon as possible and no later than 12 February 2026 when the 
Commission should submit the general CCP-RRR assessment report. 

8