ISDA Proposes CCP Recovery and Continuity Framework
Wednesday 04 February 2015The ISDA CCP Default Management, Recovery and Continuity paper
proposes a framework for recovery and sets out tools that can be
used to re-establish a matched book following the default of one or
more clearing members. The paper does not cover non-default losses
and those relating to liquidity shortfalls.
The proposed recovery measures are consistent with the recommendations made by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions in October 2014, and include a portfolio auction of the defaulted clearing member’s portfolio, limited cash calls to solvent clearing members, loss-allocation mechanisms in the form of a pro-rata reduction of unpaid obligations of the CCP, and consideration of a partial tear-up of contracts to re-establish a matched book.
ISDA believes the recovery of a CCP is preferable to its closure. As a result, recovery efforts should continue so long as the CCP’s default management process is effective, even if prefunded resources have been exhausted. In the event the default management process hasn’t been effective in re-establishing a matched book – signaled by a failed auction – the CCP may have to consider the closure of the clearing service. At this point, it is likely that resolution authorities will be considering whether this should trigger resolution.
ISDA also believes that recovery measures should be clearly defined in clearing service rule books to provide transparency and predictability over the maximum time frame for the default management process before recovery tools are deemed to have failed.
ISDA further recommends that clearing services should be segregated and structured to be of limited recourse to the clearing provider to mitigate the potential for contagion across other clearing services of the CCP.
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The proposed recovery measures are consistent with the recommendations made by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions in October 2014, and include a portfolio auction of the defaulted clearing member’s portfolio, limited cash calls to solvent clearing members, loss-allocation mechanisms in the form of a pro-rata reduction of unpaid obligations of the CCP, and consideration of a partial tear-up of contracts to re-establish a matched book.
ISDA believes the recovery of a CCP is preferable to its closure. As a result, recovery efforts should continue so long as the CCP’s default management process is effective, even if prefunded resources have been exhausted. In the event the default management process hasn’t been effective in re-establishing a matched book – signaled by a failed auction – the CCP may have to consider the closure of the clearing service. At this point, it is likely that resolution authorities will be considering whether this should trigger resolution.
ISDA also believes that recovery measures should be clearly defined in clearing service rule books to provide transparency and predictability over the maximum time frame for the default management process before recovery tools are deemed to have failed.
ISDA further recommends that clearing services should be segregated and structured to be of limited recourse to the clearing provider to mitigate the potential for contagion across other clearing services of the CCP.
Read more