benoit cœure : central counterparty recovery and resolution keynote speech by mr benoit cœure, member of the executive board of the european central bank, at exchange of ideas # 2 “ central clearing – guarantee of stability or new moral hazard? ”, organised by eurex clearing, london, 24 november 2014. * * * summary the mandatory use of central clearing is a relatively new regulatory tool for mitigating systemic risk in the otc derivatives space. it has brought the central counterparties ( ccps ) to the forefront of financial market regulation. it is therefore crucial for ccps to have comprehensive and effective recovery plans, relying on a wide range of recovery tools, to continue providing their critical services also in a very severe crisis without requiring the use of resolution powers by authorities. obviously the stability of ccps primarily depends on the establishment and implementation of robust risk management framework. but ccps are also in a unique position to set up efficient and comprehensive recovery plans as they can base them on contractual arrangements with members. but ccps need to have appropriate procedures for managing conflicts of interest between stakeholders – it is vital to involve all those who would bear losses in the design of the recovery plan. and on the regulatory side, we need to make sure our approach is cautious and non - prescriptive at this stage. i am confident that ccps, authorities and stakeholders will work together constructively to meet the ambitious objectives set out in the recent cpmi - iosco report. * * * ladies and gentlemen, today, i want to share some thoughts with you on the recovery and resolution of central counterparties ( ccps ). the mandatory use of central clearing as a regulatory tool for mitigating systemic risk in the otc derivatives space is a rather new feature in the history of financial market regulation. it has brought ccps to the forefront of financial markets and financial market regulation hence it is crucial for ccps to have comprehensive and effective recovery plans. when we talk about “ recovery ” in relation to ccps, we refer to the ability of a ccp to recover from a threat to its viability and financial strength so that it can continue to provide its critical services without requiring the use of resolution powers by authorities. resolution, on the other hand refers to the orderly winding - down of an fmi, and would take place only if recovery fails or is not desirable. last month, the committee on payments and market infrastructures ( cpmi ) and the international organization of securities commissions

it is anticipated that an assessment of the consistency of the outcomes of the application of the pfmis to ccps will start in autumn 2015. all these measures demonstrate that the regulatory community is extremely serious – and transparent – about the proper and equal implementation of the pfmi. however, even if the safety rules under the pfmi are properly implemented, the unthinkable may still happen. central banks and regulators have learned from the recent financial crisis that focussing only on “ normal ” risk management is not enough. in the event of a default of a major clearing member, a ccp might not be able to allocate all the losses and liquidity shortfalls that may occur. therefore, each ccp needs to have a recovery plan for allocating any residual losses and liquidity shortfalls so that it can ensure continuity of its clearing services even when normal defences have failed. without a robust recovery plan, the ccp might have to be resolved. ccp recovery is therefore a crucial issue. one could even argue that continued provision of services is more important for ccps than for other financial institutions. this is because ccps, as for fmis in general, are different to other financial institutions from a number of perspectives : 1. the use of a ccp is mandatory for certain products. so the relevant clearing services must be preserved under any and all circumstances. 2. ccps are systemic risk managers at the core of the financial system. their smooth operation is a necessary condition for many other types of financial services. 3. in most cases, ccps have only very few – if any – substitutes or alternative providers. 4. the size and composition of ccp balance sheets is different – for instance, their balance sheets rarely include subordinated debt instruments. this makes bail in as a recovery or resolution tool difficult. designing recovery tools although setting up recovery plans will be a challenge for ccps, they are in a unique and perhaps better situation to do so than other financial institutions such as banks. banks also bis central bankers ’ speeches need such recovery arrangements. a key difference between banks and ccps is that a ccp ’ s recovery plan can be based on contractual agreements with its members. unlike banks ’ protected depositors, they can be assumed to understand and manage their risk exposures. ccps must have rules and procedures that allocate losses and liquidity shortfalls that are not covered by prefunded resources. from that perspective, ccps are in a