A Balancing Act
Aligning incentives through financial resources for effective CCP resilience, recovery and resolution
Our new paper sets forth recommendations related to the financial resources—including central counterparties' (CCPs) own-funds capital—that should be available to CCPs during times of market stress stemming from clearing member default(s) or non-default losses.
The volume of transactions cleared by CCPs has increased significantly as a result of derivatives market reforms, including mandatory clearing and non-cleared derivative margin rules. While clearing has reduced risk in the financial system through netting and collateralization, credit and operational risks have become increasingly concentrated in a small number of large, globally interconnected CCPs and create a new central point of potential systemic failure.Over the past few years, regulators have worked together and, with input from CCPs, their members and other market participants, have made substantial progress in developing and strengthening a global framework to address this risk.
We believe that further work is needed to ensure that the risk management, governance and oversight models of CCPs keep pace with their growing systemic importance. It is critical to clearly understand the continuum of resources available for the CCP to manage stress scenarios, and the alignment of incentives so that clearing members and their shareholders do not serve as a backstop for CCPs that are for-profit institutions.
Our proposals address each phase of the resilience, recovery, resolution and recapitalization process in order to strengthen the clearing infrastructure and the networks within the system, promoting confidence and providing transparency for all participants.
Central clearing is essential to managing systemic risk, but the global clearing framework is only as strong as the adequacy and seamless continuum of the financial resources underpinning it. Creating the right balance and aligning incentives between members and CCPs/their shareholders will be critical to supporting resilience, recovery and resolution in times of stress.
To learn more, download the full paper - A Balancing Act: Aligning incentives through financial resources for effective CCP resilience, recovery and resolution