In October, the WFE submitted two consultation responses: one to the FSB, and one to CPMI-IOSCO. Essential Aspects of CCP Resolution Planning; CPMI-IOSCO Consultative Report: Resilience and Recovery of Central Counterparties (CCPs) – Further Guidance on the Principles for Financial Market Infrastructure (PFMI).
A summary of the WFE’s response to the FSB is below:
- The WFE considers recovery is almost always preferable to resolution, but we welcome well-designed international efforts to enhance and strengthen how CCPs would be resolved in the event of a systemic crisis, such as the simultaneous default of several large global banks.
- The WFE supports further initiatives which encourage better planning by resolution authorities, particularly when they encourage international cooperation between regulatory bodies.
- Any resolution framework or guidelines need to retain sufficient flexibility, however, to ensure the continued smooth operation of the wider market in the event of a resolution situation.
A summary of the WFE’s response to CPMI-IOSCO is below:
The WFE has previously expressed support for initiatives such as the CPMI-IOSCO PFMI, and in particular the principles-based approach through which they have been issued. The flexible approach of these principles allows CCPs to continue to employ prudent risk management practices, while allowing sufficient flexibility to fit the national/regional legal and regulatory requirements in which they operate.
The WFE acknowledges the objective of bringing further clarity to the existing PFMI standards, but is concerned that the proposed further guidance creates a more prescriptive set of risk management requirements for CCPs to follow. This is likely to compromise the effectiveness of the standards, and the ability of CCPs to operate effectively in the event of another financial crisis.
As such, the WFE advocates for:
- Governance and disclosure arrangements that are appropriate and proportionate.
- A level of flexibility in the use of risk management tools, to ensure they can appropriately function in stressed times, as well as take into account local nuances.
- An appropriate funding requirement to ensure member and CCP contributions are risk based, with incentives that are balanced and aligned.
- An acknowledgement of other relevant legislation (for example, Basel III requirements), to mitigate against unintended consequences that may have an adverse effect on the functioning of the market, or the ability to manage risk.