The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, has responded to the Committee on Payments and Market Infrastructures (CPMI) & International Organization of Securities Commissions (IOSCO) discussion paper on central counterparty default management auctions.
The purpose of the discussion paper is to facilitate the sharing of existing practices on default management auctions, and to foster dialogue on the key concepts, processes and operational aspects used by CCPs in planning and executing default management auctions.
The CPMI-IOSCO paper sets a baseline of best practices, while recognising the importance of giving CCPs the ability to adapt practices to address the specific circumstances of a particular default. This is welcome, and a fitting complement to the CPMI-IOSCO Principles for Financial Market Infrastructures. Importantly, CPMI-IOSCO have acknowledged the importance of taking into account the product that is being cleared and the local (or, in many cases, cross-border) market.
The WFE response can be summarised as follows:
- It is of crucial importance that default management auctions preserve an incentive structure which promotes CCP recovery over resolution, ensuring that all participants fully play their appropriate role in line with the interests of financial stability The WFE recommends that any guidance on default management auctions should not only be directed to CCPs, but also to the clearing members, and potentially clients, as their participation will effectively determine the success or failure of the auction.
- The WFE believes that proposals around compensation following recovery/resolution, and/or overly large CCP skin-in-game contributions could reduce the likelihood of a successful auction outcome, and should be avoided.
- Addressing cross-CCP shocks such as clearing member or participant defaults is complicated, not least because CCPs operate worldwide from different time zones and are subject to local regulatory and bankruptcy regimes. This makes deference to home regulatory considerations essential with respect to cross-border supervisory planning and co-operation.
- The board of the CCP cannot and should not abdicate accountability for the success or failure of default management, even when outsourcing some aspects to external parties, including clearing members. It is inappropriate for external parties (other than regulators) to have overriding decision-making powers concerning the conduct of default management processes.
- The principle of independence is fundamental to a CCP being able to effectively manage stress events, and should not be impaired by the commercial interests of its clearing members.
Nandini Sukumar, Chief Executive Officer, WFE said: “The WFE is supportive of this paper, which aims to promote best practice by summarising relevant considerations. This is important, not least because the close collaboration between a CCP and its primary regulator should not be complicated by overly proscriptive default management auction frameworks at the international level. As the global body for CCPs, we recognise that deference to local regulation is essential to the successful functioning of default management processes.”