CCP Recovery and Resolution: How to avoid pro-cyclicality and increased systemic risk in distressed markets?
The failure of Lehman Brothers almost a decade ago showed the shock-absorbing capacity of CCPs. With the increased importance of CCPs in derivatives trading, their systemic importance has also surged. This makes it even more important to complete the existing CCP legislation with a framework for orderly resolution in case of distress. Two elements are critical for the credibility of this framework: i) the distribution of the losses from the resolved CCP (e.g. cash calls and variation margin gains haircuts) and ii) the coordination of the resolution activities (e.g. disclosure of the resolution plans).
These elements were the focus of discussion at a joint CEPS-ECMI conference held in Amsterdam on June 9th. While acknowledging that the role of resolution colleges is vital in coordinating the preparation and execution of the CCP resolutions, there was a broad consensus that it will be very challenging to make them work in crisis situations. Resolution colleges are very large, involving ministries, competent authorities, resolution authorities, etc. of the CCP and their clearing members. But the experience during the banking crisis showed that they should be small and flexible to be effective in situations in which an institution needs to be resolved overnight or over the course of a weekend. Given the lack of experience with CCP resolution colleges and the complexity of the system, it will be essential for the competent authorities to regularly review and practise effective responses to crisis scenarios.
For the full meeting report, please visit the event page.