Recovery and resolution of central counterparties

KEY POINTS

Each European Union (EU) Member State has the following responsibilities.

• Appointing one or more resolution authorities. These:
  • may be national central banks, ministries or public authorities with administrative powers;
  • have the expertise, resources, operational capacity and extensive powers to act quickly and flexibly;
  • are in charge of resolution planning, including resolvability assessments and, where necessary, exercising resolution powers.
• Designating a single ministry with overall responsibility for exercising the functions entrusted to the ministries under the legislation.
• Applying penalties for breaches of the regulation.

Resolution authorities establish, manage and chair a resolution college. This includes the relevant authorities and provides a framework to:

• share information;
• draw up resolution plans;
• assess a CCP’s resolvability and possible obstacles;
• coordinate public information about resolution plans and strategies.

The European Securities and Markets Authority (ESMA):

• drafted various regulatory technical standards that were adopted by the European Commission;
• created the ESMA Resolution Committee that promotes the drawing up and coordination of resolution plans and develops methods for the resolution of failing CCPs;
• cooperates with the European Banking Authority and the European Insurance and Occupational Pensions Authority;
• maintains a central database of national penalties applied for breaches of the legislation.

Competent authorities, resolution authorities and ESMA:

• cooperate closely to carry out the tasks set out in the regulation;
• base decisions on principles such as:
  • proportionality in view of the CCP’s legal form, size, complexity and liquidity,
  • the need for efficacy and timeliness, the need to keep costs down and the need, as far as possible, to avoid the use of public finance.

Recovery planning requires CCPs to draw up and maintain a recovery plan that:

• sets out measures, with or without a default, to restore financial soundness;
• includes measures to address all possible risks, absorb losses and replenish financial resources;
• contains indicators based on a CCP’s risk profile;
• does not assume access to public finance or central bank liquidity;
• considers the interests of all stakeholders;
• ensures clearing members do not have unlimited exposure to the CCP.

It also requires the competent authority, supervisory college and resolution authority to assess the recovery plan and consider any changes.

Resolution planning requires the following.

• The resolution authority of the CCP has to draw up a resolution plan that:
  • sets out how it would use its resolution powers to absorb losses and ensure the continuity of the CCP’s critical functions;
  • takes account of the impact of the plan on clearing members, financial markets and the financial system;
  • does not assume access to public finance or central bank help;
  • makes prudent assumptions about finance that might be available.
• CCPs under resolution have to cooperate with the resolution authority and provide all the necessary information.
• The resolution college has to agree on the plan, including any changes, within 4 months of receiving it.

Assessing resolvability requires the resolution authority, coordinating with the resolution college, to:

• assess whether a CCP is resolvable, to enable it to continue operating its critical functions;
• identify any obstacles to resolvability and instruct the CCP to take action to remove them.

Early intervention measures enable a competent authority to instruct a CCP it considers could be facing financial problems to:

• take corrective action;
• remove some or all of the senior management or board members.

Resolution authorities take special account of the following when implementing their plans.

• Objectives:
  • continuity of the CCP’s critical functions and of its key links with other financial markets’ infrastructures;
  • avoidance of damage to the financial system;
  • protection of public funds.
• Conditions:
  • actual or likely failure of a CCP;
  • absence of an alternative private sector solution;
  • resolution being in the public interest.
• Valuation:
  • two assessments to ensure a fair, prudent and realistic appreciation of the CCP’s assets, liabilities, rights and obligations.
• Safeguards:
  • shareholders, clearing members and other creditors should not lose more than if the resolution authority had not intervened (‘no creditor worse off’ principle);
  • clients and indirect clients to which losses have been passed on by their clearing members have the right to a proportionate share of the compensation that those clearing members may receive;
  • anyone affected by a crisis prevention measure order or resolution action has a right of appeal.

Resolution authorities can apply the following measures, individually or in combination.

• Position and loss allocation. Terminating contracts, reducing a CCP’s payment obligations to non-defaulting clearing members or requiring the latter to make a cash contribution to the CCP.
• Write-down and conversion. Reducing or converting the size of instruments of ownership, debt or other unsecured liabilities, requiring a CCP to provide and implement a business reorganisation plan.
• Sale of business. Selling ownership or any assets, rights, obligations or liabilities of a CCP in the resolution procedure.
• Bridge CCP. Transferring temporarily to another CCP (bridge CCP) ownership or any assets, rights, obligations or liabilities of a CCP in the resolution procedure.
• Alternative funding. Contracting to borrow or obtain other forms of financing to address temporary cash-flow problems.

Member States may, as a last resort, if a CCP failure threatens a systemic crisis, inject cash or take it into public ownership (government stabilisation tools), provided the measures are temporary and comply with EU State-aid rules and the Member State has arrangements to recoup the public funds.

The regulation amends the following:

• Regulations (EU) Nos 1095/2010 (see summary), 648/2012 (see summary), 600/2014 (see summary) and 806/2014 (see summary) and (EU) 2015/2365 (see summary);
• Directives 2002/47/EC (see summary), 2004/25/EC (see summary), 2007/36/EC (see summary), 2014/59/EU (see summary) and (EU) 2017/1132 (see summary).

Under the review procedure:

• ESMA assesses its staffing and resources needs by 12 February 2024;
• the Commission submits to the European Parliament and the Council of the European Union a report on the legislation by 12 February 2026 and a report on the effectiveness of the governance arrangements for the recovery and resolution of CCPs in the EU by 12 August 2027.

Delegated acts

The Commission has adopted seven delegated acts.

• Delegated Regulation (EU) 2023/840, which supplements Regulation (EU) 2021/23 setting regulatory technical standards specifying the methodology for calculation and maintenance of the additional amount of pre-funded dedicated own resources of the CCP (see Article 9).
• Delegated Regulation (EU) 2023/450, which supplements Regulation (EU) 2021/23 setting regulatory technical standards specifying the order in which CCPs are to pay the recompense to non-defaulting clearing members for their loss, the maximum number of years during which those CCPs are to use a share of their annual profits for such payments to possessors of instruments recognising a claim on their future profits and the maximum share of those profits that is to be used for those payments (see Article 20).
• Delegated Regulation (EU) 2023/451, which specifies the factors to be taken into consideration by the competent authority and the supervisory college when assessing the recovery plan of CCPs.
• Delegated Regulation (EU) 2023/1192, which sets regulatory technical standards specifying the content of the written arrangements and procedures for the functioning of the resolution colleges.
• Delegated Regulation (EU) 2023/1193, which sets regulatory technical standards specifying the contents of the resolution plan.
• Delegated Regulation (EU) 2023/1615, which sets regulatory technical standards specifying the conditions under which compensation, cash equivalent of such compensation or any proceeds that are due pursuant to Regulation (EU) 2021/23 are to be passed on to clients and indirect clients and the conditions under which passing on is to be considered proportionate.
• Delegated Regulation (EU) 2023/1616, which sets regulatory technical standards specifying:
  • the circumstances in which a person is deemed to be independent from the resolution authority and from the CCP;
  • the methodology for assessing the value of assets and liabilities of a CCP;
  • the separation of the valuations;
  • the methodology for calculating the buffer for additional losses to be included in provisional valuations; and
  • the methodology for carrying out the valuation for the application of the ‘no creditor worse off’ principle.
• Delegated Regulation (EU) 2024/450, which sets regulatory technical standards specifying the minimum elements to be included in a business reorganisation plan and the criteria to be fulfilled for its approval by the resolution authority.