Press Release - Creating a Stronger Financial System: New EU rules for the recovery and resolution of Central Counterparties - Brussels, 28 November 2016
The European Commission has today proposed new rules to ensure that systemic market infrastructures in the financial system, known as Central Counterparties (CCPs), can be dealt with effectively when things go wrong.
A CCP acts as the intermediary to both sides of a transaction in a financial instrument, including bonds, equities, derivatives andcommodities (such as agricultural products, oil and natural gas). They are critical in helping to reduce risks and interconnections through the financial system. They help financial firms and end users such as corporates manage their business risks. The scale and importance of CCPs in Europe and globally has nearly doubled since the post-crisis G20 commitment to clear standardised over-the-counter (OTC) derivatives through CCPs. A large proportion of the EUR 500 trillion of derivatives contracts that are outstanding globally are cleared by 17 CCPs across Europe.
There are already high regulatory standards in place for EU CCPs, set out in the European Market Infrastructure Regulation ("EMIR", see MEMO/12/232). However, no EU wide rules are in place for the unlikely scenario where CCPs face severe distress or failure and therefore need to be recovered or resolved in an orderly manner. Today's proposal aims to put into place a recovery and resolution framework to CCPs which are systemically important for the financial system. This will ensure that the critical functions of CCPs are preserved while maintaining financial stability and helping to avoid the costs associated with the restructuring and the resolution of failing CCPs from falling on taxpayers.
Vice-President Valdis Dombrovskis, responsible for Financial Stability, Financial Services and Capital Markets Union, said: "This proposal will strengthen Europe's financial system further and aims at protecting taxpayers by ensuring we can deal with a Central Counterparty if it falls into difficulty. That's important because Central Counterparties are a critical part our financial system, helping businesses manage their risks. It will complement the stronger regulation of derivatives markets that we put in place after the crisis".
Vice-President Jyrki Katainen, responsible for Jobs, Growth, Investment and Competitiveness, said: "Central Counterparties work across borders and are critical in helping to reduce risks throughout the financial system. Nevertheless, we must be prepared for the event – however low the probability – of a failure of a CCP and have the necessary rules in place. Today's proposal is important in securing confidence in our financial system."
The financial crisis clearly illustrated that the failure of an important financial institution can cause critical problems for the rest of the financial system and can negatively impact growth across the wider economy. It is important that authorities in Europe have the powers to step in were a CCP to fail, and deal with it in an orderly manner.
Key elements of the proposal
The proposed rules for CCPs set out provisions comparable to those in the recovery and resolution rules for banks (Bank Recovery and Resolution Directive– BRRD) and are based on international standards. However, as CCPs are very different businesses to banks, this proposal contains CCP-specific tools that better align with CCPs' default management procedures and operating rules, especially to determine how losses would be shared.
The proposed rules require CCPs and authorities to prepare for problems occurring, intervene early to avert a problem, and step in when things have gone wrong.
Preparation and prevention
The proposed rules require CCPs to draw up recovery plans which would include measures to overcome any form of financial distress which would exceed their default management resources and other requirements under EMIR. This should include scenarios involving defaults by clearing members of the CCP as well as the materialisation of other risks and losses for the CCP itself, such as fraud or cyberattacks. Recovery plans are to be reviewed by the CCP's supervisor.
Authorities responsible for resolving CCPs (i.e. resolution authorities) are required to prepare resolution plans for how CCPs would be restructured and their critical functions maintained in the unlikely event of their failure.
page source http://europa.eu/
