The Clearing House and Isda Issue White Paper, Clarifying CCP Resolution

A recent paper has outlined a number of systematic risks shouldered by CCPs ahead of needed regulatory clarity.

The Clearing House and the International Swaps and Derivatives Association (ISDA) have jointly issued a white paper delving into a number of key issues that regulatory entities could take under consideration when formulating an aggregated framework for central counterparties (CCPs), per a recent ISDA statement.

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The paper’s release comes at an important time for CCPs, which have ironed out a critical role across the financial system not just in the United States but globally. Currently, there is lacking a unified and comprehensive resolution framework which would necessitate a more established stance – any clarity in this regard would go a long way help streamline any potential issues or headwinds for CCPs.

At the present, CCPs carry large concentrations of risk, namely as a result of such high proportions of cleared swaps – 70% or more. This is due to a flurry of global mandates that require standardized derivatives to be centrally cleared. The recent paper also follows on the heels of a consultation release by the Financial Stability Board (FSB) earlier this year, which had focused on public consultation standards or guidance for CCP resolution planning, as well as resolution strategies and resolution tools.

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The latest white paper by The Clearing House and ISDA is the manifestation of an attempt to inform on that effort. In particular, the white paper addressed CCP Resolution, as well as potential resolution tools or approaches that can be taken to undergo further discussion in this space. Finally, the paper calls for a comprehensive evaluation by the official sector and industry.

In addition, the white paper also highlights and offers support for overall guidance measures that have been codified in the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions.

According to Greg Baer, President of The Clearing House Association, in a recent statement on the release of the paper: “Having devoted considerable thought and resources to ensuring the resolvability of the world’s largest banks, it is now time to take the lessons learned in that process and ensure that CCPs — where much risk has been concentrated by the post-crisis regulatory regime — are equally resolvable.”

“The primary focus of regulators and market participants should be on CCP resilience and developing robust CCP recovery frameworks. Nonetheless, we can’t ignore the issue of CCP resolution and the impact the collapse of a CCP would have on financial stability. It’s therefore important this issue is considered in depth,” reiterated Scott O’Malia, ISDA’s Chief Executive in an accompanying statement.

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