CCP recovery and resolution:
preventing a ﬁnancial catastrophe
Department of Clearing and Settlement,
Financial Services and Markets Authority, Brussels, Belgium
Purpose –This paper aimsto discuss the EuropeanCommission’s proposal for a central counterparty (CCP)
recovery and resolutionregulation. In this respect, the paper comments the consequences, risksand attention
points for CCPsand their authorities.
Design/methodology/approach –This paper focuses on the proposedrules surrounding CCP recovery
and resolution.The paper ﬁrst familiarizes the reader with the risk management procedurescurrently obliged
before discussingthe resolution and recovery provisions foreseen in the proposal.
Findings –The proposed regulationcommands signiﬁcant requirements for CCPs and for their regulators.
Not only will CCPs haveto draft a recovery plan but also a resolution authoritywill need to be assigned. The
latter will havethe task, in consultation with a resolution college,to draft a resolution plan. When a resolution
is inevitable, authorities will need to assure the continuation of the CCP’s critical functions, thereby
warrantingﬁnancial stability and investor protection.
Originality/value –To the best of the author’s knowledge,there are no other papers that provide a holistic
overview of the newly proposed regulationand describe the choices to be made during a CCP’s resolution.
This paper will be of interest to allCCPs and their stakeholders, such as their regulators, clearing members
and their clientsand other linked ﬁnancial market infrastructures.
Keywords Financial stability, Default, Investor protection, CCP, Clearing members
Paper type General review
The desire of the G20 to centrally clear standardisedover-the-counterderivatives, reﬂected in
the US Dodd-Frank Act and in the European Market Infrastructure Regulation (EMIR), has
substantially increased the importance of central counterparties (CCPs), which are ﬁnancial
market infrastructures that interposethemselves between market participants to reduce and
centralise counterparty risk. Indeed, according to the derivative statistics of the Bank for
InternationalSettlements, on averagemore than 50 per cent of the US$493tn globalmarket in
over-the-counter derivatives was centrally cleared in 2015. As discussed by Elliot (2013),
CCPs can be considered as the backbone of the ﬁnancial system and are mostly “too
importantto fail”because of their interconnectedness with otherﬁnancial institutionsand the
increasedvolumes of clearing thoughCCPs, leading to a hugeconcentration risk.
That is, a sudden default of a CCP would put a halt to the trading and settlement of
ﬁnancial instruments, thereby interrupting ﬁnancial markets and potentially causing
liquidity problems for clearing members and their clients. A CCP thus acts as a ﬁrewall
under normal circumstances but could spread a ﬁnancial disease to the entire economy in
case of a sudden and/or unorderlydefault.
Luckily, the failure of a CCP can be consideredas a “tail of the tail”risk, where e.g. three
or more large clearing members, typically globalsystemically important institutions, failed
on their own payment obligations,thereby causing ﬁnancial problems for the CCP. As credit
Journalof Financial Regulation
Vol.26 No. 3, 2018
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