The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, has today responded to the Financial Stability Board’s (FSB) discussion paper on financial resources to support CCP resolution and the treatment of CCP equity in resolution.
The WFE’s response notes that, whilst the scenarios in which a CCP would need to be resolved are extreme and remote, work by authorities such as the FSB on the topic of CCP resolution gives some clarity to stakeholders concerned with managing their risk. Today’s response can be summarised as follows:
- The financial system is best served by a regime that incentivises market participants’ active participation in the recovery process. The WFE reiterates its position that recovery should be given every opportunity to succeed, and resolution should only be invoked as a last resort once all appropriate recovery measures have been exhausted by the CCP.
- The WFE supports taking three factors into account when assessing financial resources for CCP resolution and the treatment of CCP equity in resolution: different CCP ownership structures; different CCP organisational structures; or the products cleared by the CCP.
- The WFE welcomes the FSB’s characterisation of skin-in-the-game equity but is concerned about the proposal of compensating clearing members with CCP equity. The WFE believes a CCP should not serve as a guarantor for the risk taking of its participants but exists to manage the systemic risks intrinsic in trading, especially of derivatives, by requiring that those who create risk exposures back them up with sufficient resources.
- The WFE does, however, recognise that CCP equity should be a consideration in resolution planning, but stresses that none of these measures should be taken until the CCP has been able to exhaust the tools and resources in its recovery plan.
Nandini Sukumar, CEO, WFE said: “The WFE broadly supports the direction of this discussion paper from the FSB, but there are elements that need serious review, particularly the proposals around compensation procedures. We believe these proposals risk introducing a new moral hazard in the recovery process, and increase the likelihood that public intervention would be required. It is of crucial importance that clearing members – who bring the market risk to the CCP – have incentives aligned to the recovery of the CCP in a crisis.”