Central counterparty clearing was introduced in the aftermath of the financial crisis and finally agreed at the 2009 G20 Pittsburgh summit to address risk contagion across the financial system. Since then, a significant amount of the financial risk of the global financial market has been processed by and concentrated in central clearing counterparties (CCPs) on behalf of clearing members and their clients. This assumes that CCPs have the capacity to manage this risk concentration in stressed circumstances. But what if these critical nodes have been reaching their own limits?
Existing regulations, such as the European Market Infrastructure Regulation (EMIR1) for example, have contributed since 2012 to the increased resilience of CCPs and of wider financial markets against the broad range of risks processed and concentrated in CCPs. However, no system of rules and practices can prevent existing resources from being inadequate in managing the risks incurred by the CCP, including one or more defaults by clearing members.
Given their growing importance in financial markets, the failure of a CCP could affect banks and the wider economy. To address the challenges posed by the growing importance of CCPs, and the potential risks for financial stability if a CCP were to fail, the Presidency of the Council of the EU and the European Parliament recently reached a political agreement on a special recovery and resolution framework for CCPs.
This new EU CCP recovery and resolution framework aims to ensure that both CCPs and national authorities in the EU have the means to act decisively in a crisis scenario. The new rules will also ensure that CCPs' critical functions are preserved, while maintaining financial stability and helping to prevent the costs associated with the restructuring and the resolution of failing CCPs from falling on taxpayers.
Why is it relevant for the Swiss financial market?
In view of the global nature of the markets served by CCPs, Switzerland has also adopted2 legislation addressing issues dealt with in the upcoming EU CCP recovery and resolution framework. However, FINMA is also required to consider the regulations of foreign supervisory authorities3, and practical experience has shown that FINMA assesses and eventually approves recovery and resolution measures also in line with international regulations, and in cases where the Swiss regulation is not explicit enough, recourse is or can be taken to international and the European regulation.
Furthermore, a CCP has to ensure its ability to apply recovery measures, where necessary, to contracts or assets governed by the law of a third country (e.g. Switzerland) or to entities based in third countries (e.g. Switzerland). The CCP’s operating rules should therefore include contractual provisions ensuring this ability. In light of the cross-border global nature of certain CCP operations, decisions by resolution authorities can also have economic and fiscal effects in other jurisdictions (e.g. Switzerland).
Find out more in our new publication.
How can we support you?
In our paper we present a brief rundown of the upcoming EU recovery and resolution framework and reflect on its implications for the Swiss financial market, its CCP (i.e. SIX x-clear), their clearing members as well as their clients. We’ve selected a set of rules for which we believe special attention is particularly warranted, as they touch upon clearing members and their client’s exposure and liabilities to the CCP as well as the CCP’s own resources.
We aim to contribute to a better understanding of how clearing members and their clients as well as the SIX x-clear itself will potentially be treated if SIX x-clear faces a scenario of severe distress or impending failure should FINMA assume all or partial rules from the EU recovery and resolution framework.
[1] Regulation (EU) No 648/2012.
[2] Namely the Financial Market Infrastructure Act (FMIA) and the Financial Market Infrastructure Ordinance (FMIO) both in effect since 1 January 2016.
[3] See art. 20 (1) FMIO.
