1. Effective Oversight of FMIs: What next for FMI resolution regimes?
Dr. Corinna Freund
Principal Market Infrastructure Expert
ECB Oversight Division
Effective Oversight of FMIs: What next for FMI resolution regimes?
Cambridge, 11 September 2019

2. Overview The case for FMI resolution
Main elements of effective FMI resolution regimes
Open issues and challenges going forward
What next for FMI resolution regimes?

3. The case for FMI resolution
What next for FMI resolution regimes?

4. Potential FMI lifecycle and risk mitigants
1. The case for FMI resolution
Potential FMI lifecycle and risk mitigants
Going concern
Business-as-usual up to extreme but plausible stressed market conditions
Covered by PFMI requirements for ongoing risk management of FMIs
Recovery
Extreme market conditions (beyond extreme but plausible)
Covered by PFMI requirements for any FMI to maintain an effective and comprehensive plan to recover from any threat to its viability and financial strength so that it can continue to provide its critical services
Without intervention or support of public authorities
Resolution
Situations where recovery has failed or is likely to fail, or may compromise financial stability
Intervention by resolution authority with the objective to preserve continuity of critical functions without exposing taxpayer to loss
Covered by FSB Key Attributes of Effective Resolution Regimes of Financial Resolution and related follow-up guidance
Effective Oversight of FMIs – What next for FMI resolution regimes?

5. Importance of FMI resolution
1. The case for FMI resolution
Importance of FMI resolution
Given the risk concentration in FMIs, a disorderly FMI failure would likely lead to severe financial disruptions for:
FMI participants (that are often also participants in other FMIs and providers of systemically relevant financial services)
Any other FMIs to which the failing FMI is linked
Ultimately, the financial system more broadly
These systemic risk implications could be particular severe as, given the oligopolistic nature of FMI services, there would often not be a promptly available substitute for the failing FMI
Objectives of FMI resolution:
Minimize market disruption and contagion risk through continuity of critical services
Stem erosion of market confidence through predictable arrangements and credible intervention of public authorities
Pre-empt moral hazard in terms of potential reliance on public bail-out
Ensure due consideration of cross-border financial risk implications
Effective Oversight of FMIs - What next for FMI resolution regimes?

6. 2. Main elements of effective FMI resolution regimes
What next for FMI resolution regimes?

7. 2.1 Basic framework for all FMIs
2. Main elements of effective FMI resolution regimes
2.1 Basic framework for all FMIs
FSB Key Attributes of Effective Resolution Regimes (KA) (2011):
“Any financial institution that could be systemically significant or critical if it fails should be subject to a resolution regime that has the attributes set out in this document”
FMIs should be subject to resolution regimes that apply the objectives and provisions of the KA in a manner as appropriate to FMIs and their critical role in financial markets
FMIs within the scope of the KA include systemically important payment systems, central securities depositories (CSDs), securities settlement systems (SSSs), central counterparties (CCPs), and trade repositories (TRs)
FMI Annex (2014):
Guidance on the practical implementation of the KA for systemically important FMIs (as a new annex to the KA)
Covers both resolution of FMIs and FMI support in resolution of FMI participants (i.e. to ensure continued access to critical FMI services for participants that are systemically important banks and that are in resolution)
Effective Oversight of FMIs - What next for FMI resolution regimes?

8. Key elements to ensure effective FMI resolution (1)
2. Main elements of effective FMI resolution regimes
Key elements to ensure effective FMI resolution (1)
Substantive area
Specific guidance for FMIs
Resolution objectives
Continuity and timely completion of payment, settlement, clearing and recording functions
Continuous access of participants to securities or cash accounts and collateral
Avoid disruption of links between FMI in resolution and other FMI
Continuous processing of – and access to – data held in TRs
Resolution authority
Explicit mandate for pursuing financial stability and maintaining continuity of critical FMI functions without taxpayer loss
Dedicated FMI expertise, close cooperation with FMI supervisor
Close cooperation with central banks for FMIs settling through central bank accounts
What next for FMI resolution regimes?

9. Key elements to ensure effective FMI resolution (2)
2. Main elements of effective FMI resolution regimes
[Please select]
[Please select]
Key elements to ensure effective FMI resolution (2)
Substantive area
Specific guidance for FMIs
Entry into resolution
Should be possible if
Recovery measures are exhausted and have failed to return the FMI to viability
Relevant authorities determine that recovery measures are unlikely to succeed or are likely to compromise financial stability
Resolution tools
Enforce implementation of FMI rules and procedures (re. participant obligations for loss/position allocation
Write down (fully or partially) FMI equity
Write down or convert unsecured debt into equity
Reduce value of gains payable to participants (i.e. variation margin gains haircutting)
Write down initial margin (where not bankruptcy remote and where consistent with FMI rules)
Terminate or close out contracts
Transfer of critical functions to 3rd party or bridge entity
What next for FMI resolution regimes?

10. Key elements to ensure effective FMI resolution (3)
2. Main elements of effective FMI resolution regimes
Key elements to ensure effective FMI resolution (3)
Substantive area
Specific guidance for FMIs
Conditions for writing down variation or initial margin
Prefunded resources exhausted
Rules-based loss allocation measures implemented (or suspended for financial stability reasons)
Respect for hierarchy of claims and rules of FMIs
Applies to IM only to the extent that can be used to cover losses of other participants under rules of FMI or in insolvency
No-creditor-worse-off principle
Creditors have right to compensation where they would not receive at a minimum what they would have received in a liquidation of the FMI under the applicable insolvency regime
Insolvency counterfactual should assume the full application of the FMI’s rules and procedures for loss allocation
Equity should absorb losses first in resolution
What next for FMI resolution regimes?

11. Key elements to ensure effective FMI resolution (4)
2. Main elements of effective FMI resolution regimes
Key elements to ensure effective FMI resolution (4)
Substantive area
Specific guidance for FMIs
Resolution funding
Jurisdictions should have in place appropriate arrangements and powers to provide temporary funding to facilitate resolution and to recover any resulting losses to public funds from the FMI, unsecured creditors (incl. FMI participants) or, if necessary, financial sector participants more widely
Cooperation, coordination and information-sharing
Crisis management groups (CMGs) shall be maintained for all FMIs that are systemically relevant in more than one jurisdiction
CMGs shall include home resolution authority, authorities that participate in cooperation arrangements in line with Responsibility E and other authorities of jurisdictions material to the FMI’s resolution
CMGs should be based on written agreement
FMI resolution plan and resolvability assessment should be developed in coordination within CMGs
What next for FMI resolution regimes?

12. 2.2 Additional work for CCPs
2. Main elements of effective FMI resolution regimes
2.2 Additional work for CCPs
In line with the existing arrangements for banks, the FSB has established a dedicated working structure to monitor the implementation of the Key Attributes for FMIs and to assist in the potential development of further sector-specific guidance as needed (FMI Cross-Border Crisis Management Group, fmiCBCM)
Given the high degree of financial risk concentration in CCPs, the fmiCBCM has focused so far on CCP resolution
The focus on CCP resolution is in line with the FSB objective to ensure that mandatory central clearing is coupled with robust safeguards for global clearing (“four safeguards”) and the related “CCP work plan” launched by global standard-setting bodies in 2015
In parallel to the fmiCBCM’s work, CMGs have been established or are in the process of being established for 13 CCPs identified as systemically relevant for more than one jurisdiction
What next for FMI resolution regimes?

13. Key elements further elaborating on KA and FMI annex:
2. Main elements of effective FMI resolution regimes
[Please select]
[Please select]
FSB “Guidance on Central Counterparty Resolution and Resolution Planning”, July 2017
Key elements further elaborating on KA and FMI annex:
Resolution should focus on financial stability and continuity of critical functions in all relevant jurisdictions and maintain incentives for central clearing, default management and recovery
Further details on tools for loss and position allocation in the case of CCPs, especially on tools to re-establish matched book
Need for dedicated resolution powers for default and non-default related scenarios
Possible clearing member compensation for contributions beyond rulebook
Entry into resolution: Potential triggers and cooperation of relevant authorities
Role of equity in resolution: Need for transparency at which point in resolution it would be written down
NCWO safeguard: Alternative approaches on insolvency counterfactual
Prudent assumptions re. adequacy of financial resources in resolution
Minimum contents of CCP resolution plan
Potential changes in CCPs in response to resolvability assessments
Membership and cooperation within CMGs
Cross-border effectiveness and enforcement of resolution issues
What next for FMI resolution regimes?

14. 3. Open issues and challenges going forward
What next for FMI resolution regimes?

15. Delays in resolution planning for major global CCPs
3. Open issues and challenges going forward
Delays in resolution planning for major global CCPs
Partly due to lack of legislative progress particularly in the EU
Ambitious FSB milestones essential to foster further progress
Need for further clarity on how to ensure robust level playing field for financial resources for CCP resolution
Different benchmarks when assessing adequacy of CCPs’ financial resources in recovery and resolution
Quantitative analysis only starting to be developed
Objective to ensure robust buffers on top of recovery resources without aiming at full risk coverage
Expected further guidance in 2020
Conceptualization of non-default scenarios
Important issue in view of limited prefunded resources
Requires clear scenario development already in recovery
Potential further guidance will build on parallel work of CPMI-IOSCO
What next for FMI resolution regimes?

16. 3. Open issues and challenges going forward
Fundamental tension between role of CCP equity as primary loss absorbing resource under the Key Attributes and its small size and subordinate function in CCP rulebooks
Practical approach will likely differ across jurisdictions but should be transparent ex ante
Need for enhanced cooperation of resolution authorities with CCP supervisors/overseers and banking supervisors
Blurred boundaries between recovery and resolution (as resolution would typically commence before recovery would be exhausted and resolution tools essentially rely on rulebook provisions)
Given the role of clearing members in absorbing most losses in CCP recovery and resolution, it is critical to conduct an assessment of the credibility of funding arrangements in cooperation with CCP supervisors
Conceptual and data-sharing challenges in resolution planning in view of cross-CCP interdependencies
What next for FMI resolution regimes?

17. Thank you for your attention! Questions?
What next for FMI resolution regimes?