CPMI-IOSCO Work Guidance on CCP Resilience and Recovery

Daniela Russo - Co-chair CPMI-IOSCO PSG

Global Payment Week

Torino, 23rd September 2016

Agenda

• Key FMI-related milestones

• Objective of the additional guidance

• Areas of proposed guidance

• Conclusions

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Key FMI-related milestonesCPMI-IOSCO (selected accomplishments)

FSB (selected accomplishments)

September 2009 G20 Summit

(Pittsburgh)

January 2010

Launch effort to harmonize

international risk management

standards for FMIs

October 2011

2008 Financial

Crisis

Publication of the Key Attributes of Effective

Resolution Regimes for Financial Institutions

April 2012

Publication of the Principles for Financial Market Infrastructures

(PFMI)

December 2012

Publication of thePFMI Assessment Methodology and

Disclosure Framework

October 2014

October 2014

August 2013Publication of Assessment

Methodology for KAs for consultation

Publication of the KAs plus sector-specific

annexes, including one for FMIs

Publication of Recovery of financial market

infrastructures, provides guidance on recovery

planning (Principle 3, PFMI)

April 2015Chairs of FSB SRC, FSB ReSG, BCBS, CPMI, and IOSCO issue “2015 CCP

Workplan”

Spring 2015

Launch work on the resilience and recovery topics in the Workplan

Launch implementation assessment of 10 global

derivatives CCPs (Level 3)

ReSG creates fmiCBCM, sets terms of reference, and

launches workplan for 2016

CBCM advances work on “continuity of access” to

FMIs for banks in resolution

November 2015

August 2016

Publication of consultative report on guidance:

governance, stress testing, margin, CCP contributions

to losses, coverage and recovery

and findings from Level 3 assessment

January 2013

Launch multi-level assessment program to monitor implementation of the PFMI

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July 2015Launch ad hoc

Study Group on Central Clearing Interdependencies in

co-operation with CPMI-IOSCO

Objectives of additional guidance

Enhancing granularity with a view to;

• enhancing common understanding andconsistency in implementation;

• Urging full implementation, especially incertain critical areas;

• Leveraging on emerging good practices.

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CCP Lines of Defence – Post-PFMI

Defaulter’s margin collateral

Mutualised default fund

CCP’s own capital“Skin-in-the-game”

Access criteria, daily mark-to-market, and ongoing monitoring

Other committed resources

CCP’s rules for allocation of uncovered lossesR

eco

very

Pla

n

Defaulter’s default fund contribution

Event(s) of default

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Evidence base for PSG work

A broad scope of evidence: Concerns expressed by participants Detailed surveys of >30 CCPs from CPMI-IOSCO PSG Coordination with and input from CPMI-IOSCO implementation

monitoring exercise

Assessment of 10 derivatives CCPs (5 globally and 5 locally-active CCPs,

including US, EU, Japan, Australia, Brazil, India, Singapore) with focus on consistency

of risk management practices with the expectations in the PFMI

Overall progress in implementing the PFMI is quite positive, however,

some CCPs have not completed implementation in certain areas (e.g.

Recovery planning and Liquidity – liquidity stress testing; liquidity risk frameworks for

all ‘relevant’ currencies; due diligence of liquidity providers)

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Areas of proposed guidance

Governance Stress testing Margin CCP contributions to losses Coverage Recovery

Other work underway Supervisory stress testing Responsibility E Market-wide recommendations

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Address remaining gaps and shortcomings • In two areas remaining gaps and shortcomings should be considered serious

issues of concern that warrant immediate action and that should be addressed with the highest priority:

- recovery planning, where a number of CCPs have not yet put in place the

full set of recovery rules and procedures as required.

- credit and liquidity risk coverage, where a number of CCPs have not yet put

in place policies and procedures sufficient to ensure that they maintain the

required level of financial resources on an ongoing basis.

- In addition, some CCPs do not include sufficient liquidity-specific scenarios in their stress testing frameworks.

CPMI-IOSCO expect to conduct targeted follow-up Level 3 reviews on CCP’sprogress in these areas in the first half of 2017. This review will evaluateimplementation measures in place as of 31 December 2016.

The other points of guidance (i.e., promptly develop a plan to address andimplement necessary changes as expeditiously as practicable) have to beimplemented by end 2017 at the latest.

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Governance• The proposed guidance is intended to clarify the CCP

board’s responsibilities for several key aspects of the risk management framework, including

– Design and objectives of the margin system and stress-testing framework

– Ongoing maintenance of required financial resources

– Limiting destabilising, procyclical changes

– Review and validation of margin system and stress-testing framework

• The proposed guidance also elaborates on the CCP Board’s responsibility to facilitate information flow to and feedback from participants and relevant stakeholders

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Stress Testing

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Proposed guidance based on analytical framework

Identification of sources of credit and liquidity risks, (e.g.

Intra-day exposures, collateral)

Giving content to “extreme but plausible” scenarios for credit and liquidity (e.g. remove historical scenarios, consider

specific economic, physical, environmental, and geo-political hypothetical events, include second and higher-order impacts)

Application of scenarios to exposures

Coverage

Additional analysis

Margin

PSG additional guidance focus on:

Measuring and mitigating procyclicality

Addressing specific wrong-way risk

Detailed guidance on backtesting and sensitivity analysis

Incorporation of liquidation costs

Review and monitoring of portfolio margining

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CCP Contributions to Losses

A CCP’s contribution of its own resources to losses canimprove participants’ and other stakeholders’ confidence inhow the CCP is risk managed

Industry has been generally dissatisfied with the amounts anddecision-making processes on CCP contribution to losses (especiallyregarding “skin-in-the-game”)

Proposed guidance elaborates on how amount, seniority,and liquidity of a CCP’s “skin-in-the-game” and contributionsto custody and investment losses influence the degree ofconfidence; and

Requires governance to help improve the rigor in whichCCPs consider participant and stakeholder interests whendetermining how much capital should be exposed to losses

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Coverage Requirement

Under the PFMI, CCPs are expected to: Consider all types of credit and liquidity risk exposures and

determine and maintain the required level of resources, based on theCCPs risk profile and the PFMI minimum requirements

Consider cover 2 and cover 1 as the required minimum amount for pre-funded additional financial resources and that

Coverage level includes the participant and its affiliates; in some CCPs,“cover 1” is closer to cover 2 or 3 in terms of individual participants

Proposed guidance focuses on rigorous stress testing to assure adequacy of resources

clarifying that the board has explicit responsibility for

The quality and effectiveness of such analysis

The amount of resources maintained on an on-going basis

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Recovery Recovery planning by CCPs is at varying stages of completeness

All recovery plans need to be further developed in order to observe fullythe expectations in the PFMI, as complemented by the guidance in theCPMI-IOSCO report on Recovery of financial market infrastructures

Incomplete plans and recovery-related gaps in rulebooks areserious issues of concern that warrant immediate action by theCCP, who should accord the highest priority to addressingoutstanding issues

Report will emphasize key aspects in existing guidance whereimplementation so far has often been incomplete, including: Allocation of custody and investment related losses

Adopting rules to address uncovered credit and liquidity shortfalls

Speed of replenishment

CPMI and IOSCO are working in close co-operation with ReSG inorder to ensure consistency between recovery and resolutionrequirements

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Conclusions Regulatory requirements for CCPs are stronger today than before the crisis.

However, further work is needed to achieve full observance of expectationsset out in the PFMI, as implemented in the FSB member jurisdictions

The forthcoming proposed guidance targets key areas that are critical to theresilience of CCPs, individually and collectively

Stronger governance, including consultation from stakeholders andenhancing their confidence in CCP risk management

More rigorous credit and liquidity stress testing practices

Better margin practices, including actions to assess and limitprocyclicality

Improved confidence in CCP risk management through better design anddecision-making regarding a CCP’s contributions to losses

Maintaining required financial resources on an ongoing basis and takingcorrective actions if the CCP is at a material risk of not doing so

Completion of recovery plans and coordination on resolution planning

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