The European Commission wants clearing houses (CCP) registered in the EU to be subject to new measures to harmonise rules for stressful financial or potential bankruptcy situations.
Clearing houses arrange payment through centralised counterparties for standardised derivative contracts negotiated by two parties and ensure that the transaction is fulfilled even if one of the parties goes bankrupt.
According to a draft regulation that the Wall Street Journal leaked online and that is due to be unveiled in November, the European Commission wants firstly to ensure an orderly recovery of CCPs via the introduction of a robust and complete recovery plan agreed by the CCPs and their clearing members. The second aim of the proposal is that for cases where a recovery plan does not work and/or a winding up of the CCP cannot be avoided, then the authorities would be allowed to act fast enough to protect financial stability, ensure continuity of crucial CCP functions and protect the taxpayer as far as possible.
CCPs would therefore be required to prepare recovery plans for dealing with any kind of financial stress ahead of problems arising. The recovery plans would include bankruptcy scenarios for a clearing member and the materialisation of other risks or losses. Recovery plans should not be based on any kind of special state aid, the Commission says. They should be overarching, effective, and transparent and allow affected parties to measure the potential impact on themselves, defining appropriate incentives and minimising the negative impact on stakeholders and the financial system. On this basis, the CCPs would be free to determine the appropriate options and tools for recovery. The tools could include a ‘cash call’ in the form of asking clearing members for greater resources, for example.
The European Commission’s draft text requires resolution authorities to prepare recovery plans stipulating how CCPs would be restructured and their crucial functions maintained in the event of bankruptcy.
Resolution authorities would have the right to require CCPs to change practices or legal or operational structures.
The European Commission’s plans include giving competent authorities the power to intervene in CCP operations when their survival is at risk before they reach the default stage or when their action might jeopardise financial stability.
A CCP would be placed in liquidation when it fails or its failure appears likely, when no private sector alternative could prevent its bankruptcy and when its default would threaten the public interest and financial stability.
Resolution would include a number of tools to be used separately or together – sale of key CCP functions to a viable competitor, creating a publicly controlled relay and allocating losses and positions to clearing members. The choice of which tool to use would be left to the resolution authority depending on circumstances and in line with the recovery plan agreed by the resolution college. (Original version in French by Elodie Lamer)