SIFMA AMG has submitted comments on the CPMI-IOSCO Consultative Report and FSB Discussion Note, which, in combination, propose further guidance on the Principles of Financial Market Infrastructures for Central Counterparties.

SIFMA AMG urges the FSB, CPMI and IOSCO, in their review of CCP resilience, recovery and resolution standards, to consider the interests of clearing members’ customers, many of whom have increased their centrally cleared positions due to regulatory directives.

Regarding CCP resiliency, SIFMA AMG believes that dynamic margin calculations, risk-based CCP skin-in-the-game, clearing member assessments and standby credit should comprise the available pre-resolution, dedicated resources to satisfy the credit and liquidity risks measured by stress tests. We believe that procyclicality concerns should be taken into account holistically across all types of financial resource categories. We further believe CCPs should be expressly excluded from risk managing on the basis of a presumption that the CCP will be able to use the margin of non-defaulting customers to cover credit or liquidity shortfalls. Customer collateral should never be used as a backstop in CCP risk management practices. While we understand and agree with the regulatory imperative of avoiding a future tax payer bailout of a CCP, we believe that the most appropriate way to do so is to incentivize CCPs, who generate revenue by clearing trades with margin and risk management requirements, to risk manage appropriately and put their own assets at stake rather than jeopardize the assets of pension funds, U.S. mutual funds, UCITS and other investors who have no control over how CCPs calculate margin and accept new products for clearing. AMG further believes that public disclosures and CCP recovery tools should be improved, as detailed in our comment letter.

Regarding CCP recovery, SIFMA AMG believes that a CCP’s return to a matched book would be aided by an open auction and mechanisms to continue the payment of variation margin to and from the customers of a defunct clearing member. SIFMA AMG does not believe that extraordinary measures, including mutualisation of losses to non-defaulting customers, tear-up of contracts and forced allocations, should be available for the CCP’s use in recovery. Rather, these extraordinary measures should be expressly prohibited until resolution. Only after full write-down of equity positions, which may incentivize equity holders or other parties to recapitalize, and after change of control to the resolution authority should such measures be deployed and, even then, they should be used only if no better means are available to return to a matched book or to wind up the CCP.

Regarding CCP resolution, a pre-designated regulatory authority should have constrained flexibility to initiate resolution. In considering whether to move to resolution, the designated authority should include in its consideration whether extraordinary measures, including loss mutualisation and tear up, are required to return the CCP to a matched book or to wind up the CCP’s business. SIFMA AMG agrees that CCP resolution strategies should have the objectives of financial stability and continuity of critical functions without exposing taxpayers to risk of loss, and that resolution aims should still include returning the CCP to a matched book. SIFMA AMG believes, however, that these objectives can be achieved while providing greater protections for customers, including achieving fairness in any mutualisation of loss with non-defaulting customer assets and certainty in priority of payments during a wind-up.

See also:
CPMI-IOSCO Consultative Report

FSB Discussion Note