1. Principles for Recovery and Resolution of a Financial Market Infrastructure
ACSDA Senior Leadership Summit – November 16 & 17, 2015

2. Agenda Introduction Recovery planning – key considerations
Importance of Critical Services
Stress Scenarios
Triggers
Recovery Tools
Risk management and recovery
Questions to delegates

3. A. Introduction

4. A. Introduction
The CPMI-IOSCO Principles for Financial Market Infrastructures (“PFMIs”) are designed to ensure Financial Market Infrastructures (“FMIs”) operate as smoothly as possible in normal circumstances and in times of market stress
Principle 3, Framework for the comprehensive management of risks, requires “an FMI prepare appropriate plans for its recovery or orderly wind-down… Where applicable, an FMI should also provide relevant authorities with the information needed for purposes of resolution planning.”
Principle 3 further states “an FMI should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down”
Given the systemic importance of the FMIs, the disorderly failure of an FMI would likely lead to systemic disruptions to the institutions and markets supported by the FMI, to linked FMIs, and to the financial system
Recovery and resolution plans are established to allow (a) the recovery of the FMI so that its critical operations and services may be sustained, or (b) the winding down of the non-viable FMI in an orderly manner, for instance by transferring the FMI’s critical operations and services to an alternate entity

5. B. Recovery planning – key considerations

6. B. Recovery planning – key considerations
A CPMI-IOSCO requirement
Responsibility for developing is the FMI’s
Board of Directors’ endorsement
Clearly defined governance framework
Provide procedures to allow an FMI to recover in order to continue to provide its critical services
Recovery plan allows key stakeholders to prepare for extreme events and increases the probability that the appropriate recovery tools will be identified, available and used
Uncovered losses should be borne by the FMI’s, its owners’ and its participants’ resources
The interests of those bearing uncovered losses should be considered

7. B. Recovery planning – key considerations (cont’d)
Recovery plan should not assume state or central bank support
Recovery plan and recovery tools should be legally enforceable
For example tools to allocate uncovered losses
Recovery plan should clearly define the FMIs discretion to apply the available recovery tools
A balance needs to be struck between the automatic use or discretion when applying a recovery tools
Recovery plans should be tested
May be conducted in conjunction with annual default management exercises

8. C. Importance of Critical Services

9. C. Importance of Critical Services
Systemic importance to financial system
Failure of an FMI could result in severe disruptions to financial system
Design of FMI should ensure that its critical services continue to function effectively even in times of severe market stresses – financial, operational, etc.
Particularly important where there is only one FMI providing the critical service
In some jurisdictions the transferring of the critical service to another entity is not a practicable option

10. C. Importance of Critical Services (cont’d)
Recovery plans should identify the critical services it provides
Typically includes services which are essential to the smooth functioning of the financial market and the maintenance of financial stability
Payment services
Central counterparty services
Clearing and settlement services
Depository services
Identifying critical services focusses recovery plan on:
Identifying the circumstances which may disrupt provision of the service (i.e., stress scenarios)
What is needed to recover from such scenarios (i.e., through the application of recovery tools)
What coordination is required with key stakeholders (i.e., owners, participants and relevant authorities)

11. D. Stress Scenarios

12. D. Stress Scenarios
Stress scenarios are events which would prevent an FMI from providing its critical services as a going concern
Identifying the stress scenarios should consider the various risks to which an FMI is exposed – including:
Participant default
Credit losses
Liquidity shortfalls
Investment losses
General business losses
Failures of critical service providers
Failure of affiliated entities
Linked FMI failures

13. E. Triggers

14. E. Triggers
Recovery plans should have well defined criteria (“triggers”) which calls for a prompt response and the application of recovery tools to address a stress event
Triggers should be both qualitative and quantitative
Triggers help avoid delays
Obvious examples of triggers include:
Participant defaults
Exhaustion of pre-funded financial resources
Exhaustion of liquidity resources
Less-obvious examples of triggers include:
Chronic/persistent losses from operational issues which threaten the FMIs financial viability

15. F. Recovery Tools

16. F. Recovery Tools
Recovery plans should identify its recovery tools; i.e., how it will cover financial and/or liquidity shortfalls (not covered by pre-funded resources) – including indicating the steps and time required to put them into effect
Identifying which tool to use under which circumstance
Assessing the impact of the stress event on the FMI, the owners, the participants, other key stakeholders
Recovery tools should identify recovery tools for other risks (e.g., operational, critical service providers)…not just financial and/or liquidity shortfalls

17. F. Recovery Tools (cont’d)
Stress scenarios which may require recovery tools:
Participant default
Credit losses
Liquidity shortfalls
Investment losses
General business losses
Failures of critical service providers
Failure of affiliated entities
Linked FMI failures

18. F. Recovery Tools (cont’d)
Characteristics of recovery tools
Comprehensive
Effective
Transparent, measurable, manageable and controllable
Create appropriate incentives
Minimize negative impact
Examples of recovery tools
Cash calls
Variation margin haircutting
Use of initial margin

19. G. Risk management and recovery

20. G. Risk management and recovery
The CPMI-IOSCO PFMIs are designed to ensure systemically important FMIs have robust risk management frameworks which reduce systemic risk and foster transparency and financial stability
Recovery planning should be integrated into the risk management governance framework of FMIs
Recovery plans should identify scenarios and address what needs to be done to continue to provide the critical services
Extreme scenarios which could threaten the viability of the FMI
How the FMI can to continue providing its critical services – even under stress conditions
The existence of recovery plans enhances financial market resilience and confidence
The recovery plan should also address, in the event the FMI is not able to remain viable, the steps for the orderly resolution of the FMI

21. H. Questions to delegates

22. H. Questions to delegates
Have your regulators provided guidance as to what is expected?
What role does the regulator play in the decision to apply the different recovery tools?
Is implementation or a recovery tool rule based or at the discretion of the FMI?
What is the process for developing a Recovery and Resolution plan
Regulatory expectations Canada – Phase I: December 2015
Define 1: Critical services
Define 2: Stress scenarios
Define 3: Triggers for recovery tools
Regulatory expectations Canada – Phase II: December 2016
The recovery plan must be approved by CDS’ Board of Directors
One recovery plan addressing each of the critical services
Not the Resolution plan
Has a resolution authority been appointed in your jurisdiction?
What is going on in your respective jurisdictions?

23. Joseph I. Campos Stephen Pecchia
Managing Director, Financial Risk Management
TMX/CDS
Stephen Pecchia
Executive Director, Recovery and Resolution Planning
DTCC