Central Clearing, Systemic Risk and Bankruptcy Issues

Transcription

1 Central Clearing, Systemic Risk and Bankruptcy Issues Presentation to the Futures Industry Association Japan Robert S. Steigerwald Federal Reserve Bank of Chicago November 7, 2012 The statements and opinions expressed herein are solely those of the author and not necessarily those of the Federal Reserve Bank of Chicago or the Board of Governors of the Federal Reserve System.

2 Mandatory Central Clearing and Financial Reform o Central counterparty clearing what are the implications? o The Group of Twenty (G-20) clearing mandate National legislation in Japan, the U.S. and E.U. o Policy considerations Costs and benefits (generally) Unintended consequences, competitive implications, regulatory fragmentation, etc. Intensive regulation and the need for extensive regulatory coordination, etc. Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy Policy responses and safe harbors for financial contracts (U.S. law) o Orderly liquidation for systemically important financial companies (U.S. law) o International standards for infrastructure recovery and resolution Financial Stability Board (FSB), Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) CPSS-IOSCO, Recovery and resolution of financial market infrastructures (Consultative Draft, July 2012) Concluding Thoughts...

3 Mandatory Clearing and Financial Reform Financial markets deal with the future.... [T]he function of financial claims is to telescope into the present intrinsically uncertain [future] cash flow streams. Bank for International Settlements(BIS), G-10 Contact Group on the Legal and Institutional Underpinnings of the International Financial System, Report on Insolvency Arrangements and Contract Enforceability (Sept. 2002)

4 Mandatory Clearing and Financial Reform [T]rust in the integrity of the market must be supported by formal, institutionalised safeguards. * * * * * In the context of financial transactions, the convenience, safety and trust required for national and global markets to function are largely provided by clearing and settlement arrangements. Edward J. Green, Clearing and Settling Financial Transactions Circa 2000, in Anthony M. Santomero, Staffan Viotti & Anders Vredin (eds.), Challenges for Central Banking (2001)

5 Mandatory Clearing and Financial Reform All trademarks and other rights are those of the owners respectively.

6 Mandatory Clearing and Financial Reform Osaka Securities Exchange (OSE) All trademarks and other rights are those of the owners respectively.

7 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? A central counterparty interposes itself between counterparties to contracts traded in... financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts. Committee on Payment and Settlement Systems (CPSS) & Technical Committee, International Organization of Securities Commissions (IOSCO), Principles for financial market infrastructures (April 2012)

8 Mandatory Clearing and Financial Reform

9 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? Reserve Bank of Australia, Central Clearing of OTC Derivatives in Australia (June 2011), available at:

10 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? The CCP becomes a substituted principal (not an agent) = contributes to incentive alignment

11 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? The CCP becomes a substituted principal (not an agent) = contributes to incentive alignment Direct bilateral counterparty relationships become detatched = enhances liquidity (no counterparty holdup ), may reduce barriers to competition

12 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? The CCP becomes a substituted principal (not an agent) = contributes to incentive alignment Direct bilateral counterparty relationships become detatched = enhances liquidity (no counterparty holdup ), may reduce barriers to competition The CCP cannot renegotiate the terms and conditions of the trades it clears = institutional rigidity and reduced transactional flexibility

13 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? The CCP becomes a substituted principal (not an agent) = contributes to incentive alignment Direct bilateral counterparty relationships become detatched = enhances liquidity (no counterparty holdup ), may reduce barriers to competition The CCP cannot renegotiate the terms and conditions of the trades it clears = institutional rigidity and reduced transactional flexibility The CCP s ability to assure performance notwithstanding default is critical = systemic risk implications...?

14 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? CCP default resources (an alternative proposal)

15 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? CCP default resources (an alternative proposal) Terminate non-defaulting clearing members open positions (pro rata)

16 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? CCP default resources (an alternative proposal) Terminate non-defaulting clearing members open positions (pro rata) Close out the defaulting member s open positions at settlement prices prevailing prior to default

17 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? CCP default resources (an alternative proposal) Terminate non-defaulting clearing members open positions (pro rata) Close out the defaulting member s open positions at settlement prices prevailing prior to default Losses to other clearing members are covered by the defaulting member s initial margins and guarantee fund contributions (only) = no loss mutualization

18 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? CCP default resources (an alternative proposal) Terminate non-defaulting clearing members open positions (pro rata) Close out the defaulting member s open positions at settlement prices prevailing prior to default Losses to other clearing members are covered by the defaulting member s initial margins and guarantee fund contributions (only) = no loss mutualization No guarantee of performance by the CCP = no need for risk-based capital

19 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? CCP default resources (an alternative proposal) One feature of the proposed risk-sharing arrangement... is that the CCP s equity would not be available to cover losses. Because the CCP s equity is usually relatively small in relation to the other funds available, however, this may not concern its members. John Hull, CCPs: Their Risks, and How They Can Be Reduced, Journal of Derivatives, Vol. 20, No. 1 (Fall 2012)

20 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? CCP default resources (an alternative proposal) Another... feature is that the initial margin and default fund of a member... would not limit losses in the event of a default by another member. In this respect, CCPs would be... a little more bilateral. " John Hull, CCPs: Their Risks, and How They Can Be Reduced, Journal of Derivatives, Vol. 20, No. 1 (Fall 2012)

21 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? CCP default resources (an alternative proposal) Terminate non-defaulting clearing members open positions (pro rata) Close out the defaulting member s open positions at settlement prices prevailing prior to default Losses to other clearing members are covered by the defaulting member s initial margins and guarantee fund contributions (only) = no loss mutualization No guarantee of performance by the CCP = no need for risk-based capital Systemic risk implications...?

22 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? A central counterparty interposes itself between counterparties to contracts traded in... financial markets,... thereby ensuring the performance of open contracts. Committee on Payment and Settlement Systems (CPSS) & Technical Committee, International Organization of Securities Commissions (IOSCO), Principles for financial market infrastructures (April 2012)

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24 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? L F CCP C N E D I

25 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? A B L F CCP C N E D I

26 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? A B L F CCP C N E D I

27 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? X A B Z L F CCP C N E D I

28 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? X A B Z L F CCP C N E D I

29 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? X A B Z L F CCP C N E D I

30 Mandatory Clearing and Financial Reform o Central counterparty clearing what are the implications? X A B Z L F CCP C N E D I

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32 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate CCPs have the potential to reduce significantly risks to market participants through the multilateral netting of trades and by imposing more-effective risk controls on all participants. * * * * *... CCPs also can reduce systemic risk.... Committee on Payment and Settlement Systems (CPSS) & Technical Committee, International Organization of Securities Commissions (IOSCO), Principles for financial market infrastructures (April 2012)

33 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate [CCPs] also concentrate risk. If not properly managed, [CCPs] can be sources of financial shocks, such as liquidity dislocations and credit losses, or a major channel through which these shocks are transmitted across domestic and international financial markets. Committee on Payment and Settlement Systems (CPSS) & Technical Committee, International Organization of Securities Commissions (IOSCO), Principles for financial market infrastructures (April 2012)

34 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate There are many reasons for wanting to clear centrally as big a proportion of all OTC derivatives trades as possible. This maximizes the netting benefits of central clearing and minimizes counterparty risk. It also gives regulators a better handle on the risks being taken by dealers. John Hull, OTC Derivatives and Central Clearing: Can All Transactions Be Cleared?, Banque de France, Financial Stability Review, No. 14 Derivatives Financial innovation and stability (July 2010)

35 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate Of course, there is a risk that a CCP will fail. * * * * * The consequences of a failure by a CCP that is used for OTC trades could be even more disastrous than the failure of a large dealer. John Hull, OTC Derivatives and Central Clearing: Can All Transactions Be Cleared?, Banque de France, Financial Stability Review, No. 14 Derivatives Financial innovation and stability (July 2010)

36 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate All standardised OTC derivative contracts should be... cleared through central counterparties by [year] end-2012 at the latest... [and] [n]on-centrally cleared contracts should be subject to higher capital requirements. Leaders Statement ( Strengthening the International Financial Regulatory System ), The Pittsburgh Summit (September 24-25, 2009)

37 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate National legislation in Japan, the U.S. and E.U. May 2010: Amendment to Financial Instruments and Exchange Act (Japan) July 2010: Dodd-Frank Wall Street Reform and Consumer Protection Act (U.S.) March 2012: European Market Infrastructure Regulation or EMIR (E.U.)

38 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate [T]he fact that [Central Counterparty clearing arrangements (CCPs)] will be central to the system dramatically increases their importance. In essence, global CCPs will be systemically important. William C. Dudley, Remarks at the Harvard Law School's Symposium on Building the Financial System of the 21st Century, Reforming the OTC Derivatives Market (March 22, 2012)

39 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate Thus, for the system to be safer it is not sufficient to ensure that trades are standardized and that they are mandated to be cleared through CCPs, but also it is necessary that CCPs be bullet proof. William C. Dudley, Remarks at the Harvard Law School's Symposium on Building the Financial System of the 21st Century, Reforming the OTC Derivatives Market (March 22, 2012)

40 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate Policy implications Costs and benefits (generally) Unintended consequences (e.g., moral hazard) Competitive implications, market fragmentation, etc. Intensive regulation and the need for extensive regulatory coordination, etc.

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42 Mandatory Clearing and Financial Reform o The Group of Twenty (G-20) clearing mandate Supposing... [mandatory central clearing] was in place five years ago, and around 70% of OTC derivatives went through CCPs, I don t think it would have made a whole lot of difference.... John Hull, quoted in International Financing Review (IFR), Clearing houses 'would not have prevented financial crisis, IFR 1883 (14 May to 20 May 2011):

43 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy

44 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy Bankruptcy provides a collective forum for sorting out the rights of owners (creditors and others with rights against a debtors assets) and can be justified because it provides protection against the destructive effects of an individual remedies system where there are not enough assets to go around. Thomas H. Jackson, The Logic and Limits of Bankruptcy Law (1986)

45 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy The basic problem that bankruptcy law is designed to handle... is that the system of individual creditor remedies may be bad for the creditors as a group when there are not enough assets to go around. Thomas H. Jackson, The Logic and Limits of Bankruptcy Law (1986)

46 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy Because creditors have conflicting rights, there is a tendency in their debt-collection efforts to make a bad situation worse. Thomas H. Jackson, The Logic and Limits of Bankruptcy Law (1986)

47 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy policy responses (U.S. law) Types of creditor impairment mechanisms: Automatic Stay Ipso Facto Based Remedies Setoff Rights Contract Performance ( Cherry-Picking ) Contract avoidance (affirmation)

48 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy policy responses (U.S. law) Types of creditor impairment mechanisms: Automatic Stay Ipso Facto Based Remedies Setoff Rights Contract Performance ( Cherry-Picking ) Contract avoidance (affirmation)

49 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy policy responses (U.S. law) Types of creditor impairment mechanisms: Automatic Stay creditors are prohibited from taking remedial (enforcement) actions, such as collecting debts, obtaining or realizing on collateral and filing lawsuits against the debtor; secured creditors are, however, entitled to adequate protection

50 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy policy responses (U.S. law) A... feature [of current U.S. law] that deals with the panic run problem is bankruptcy s automatic stay. The banking literature suggests that suspending convertibility (prohibiting depositor withdrawals, so that the bank need not liquidate long-term assets) is perhaps the most effective response to a panic run. Kenneth Ayotte & David A. Skeel, Bankruptcy or Bailouts?, Journal of Corporation Law, Vol. 35 (2010)

51 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy policy responses (U.S. law) The automatic stay serves the same function in bankruptcy: it effectively places a shield around the firm s assets, and ceases creditor collection efforts. Kenneth Ayotte & David A. Skeel, Bankruptcy or Bailouts?, Journal of Corporation Law, Vol. 35 (2010)

52 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy safe harbors for financial contracts (U.S. law) Types of protected contracts: Securities contracts Forward contracts Commodity contracts Repurchase agreements Swap agreements Master netting agreements

53 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy safe harbors for financial contracts (U.S. law) When the crisis hit, regulatory options for responding to distress in large, non-bank financial companies left policymakers with a no-win dilemma: either prop up failing institutions with expensive bailouts or allow destabilizing liquidations through the normal bankruptcy process. Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation, Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate (February 17, 2011)

54 Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy safe harbors for financial contracts (U.S. law) [T]he choice between bankruptcy and a rescue loan is not an either/or choice. If regulators conclude that the systemic risk concerns are so great that intervention is necessary, they could use an intermediate strategy of allowing the firm to file for bankruptcy, while selectively guaranteeing certain dangerous liabilities as an alternative to a rescue loan. Kenneth Ayotte & David A. Skeel, Bankruptcy or Bailouts?, Journal of Corporation Law, Vol. 35 (2010)

55 Recovery and Resolution (Bankruptcy) Issues o Orderly liquidation for systemically important financial companies (U.S. law)

56 Recovery and Resolution (Bankruptcy) Issues o Orderly liquidation for systemically important financial companies (U.S. law) Title II of the [Dodd-Frank] Act provides for the appointment of the FDIC as receiver of a nonviable financial company that poses significant risk to the financial stability of the United States (a covered financial company ) following the prescribed recommendation, determination, and judicial review process set forth in the Act. FDIC, Certain Orderly Liquidation Authority Provisions, 76 Fed.Reg. 41,626 (July 15, 2011)

57 Recovery and Resolution (Bankruptcy) Issues o Orderly liquidation for systemically important financial companies (U.S. law) Key features general Resolution under the Bankruptcy Code is preferred Debtors assets and liabilities transferred to a bridge company to sustain operations ( business as usual ) Losses borne by equity holders, not taxpayers Management is replaced, potential clawback of executive compensation

58 Recovery and Resolution (Bankruptcy) Issues o Orderly liquidation for systemically important financial companies (U.S. law) Key features determination of systemic importance and necessity of resolution under Dodd-Frank Title II Systemic risk determinations by U.S. Treasury Secretary, in consultation with the President, after recommendation by the Federal Reserve and FDIC (or others) FDIC determination that resolution under Title II is necessary for purposes of the financial stability of the United States and not for the purpose of preserving the... financial company.

59 Recovery and Resolution (Bankruptcy) Issues o Orderly liquidation for systemically important financial companies (U.S. law) Key features stays and safe harbors for financial contracts (Automatic) Stay not automatic (FDIC may request 90 days)

60 Recovery and Resolution (Bankruptcy) Issues o Orderly liquidation for systemically important financial companies (U.S. law) Key features stays and safe harbors for financial contracts (Automatic) Stay not automatic (FDIC may request 90 days) Safe harbors for financial contracts (limited)

61 Recovery and Resolution (Bankruptcy) Issues o Orderly liquidation for systemically important financial companies (U.S. law) Key features stays and safe harbors for financial contracts (Automatic) Stay not automatic (FDIC may request 90 days) Safe harbors for financial contracts (limited) Special protections for clearing organizations

62 Recovery and Resolution (Bankruptcy) Issues o Orderly liquidation for systemically important financial companies (U.S. law) Legal challenges to the Dodd-Frank Act (U.S.) legislative powers granted to the U.S. Financial Stability Oversight Council (FSOC); vagueness of the standards for instituting the Title II OLA authority with respect to a failing non-bank financial company; and limitations on judicial review of FSOC actions ( arbitrary and capricious standard), etc.

63 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution Financial Stability Board (FSB), Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) CPSS-IOSCO, Recovery and resolution of financial market infrastructures (Consultative Draft, July 2012)

64 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) The objective of an effective resolution regime is to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss...

65 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011)... while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation.

66 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) General powers of resolution authorities (vi) Transfer or sell assets and liabilities, legal rights and obligations,... notwithstanding any requirements for consent or novation that would otherwise apply (see Key Attribute 3.3);

67 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) General powers of resolution authorities (vii) Establish a temporary bridge institution to take over and continue operating certain critical functions and viable operations of a failed firm (see Key Attribute 3.4)

68 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) General powers of resolution authorities (x) Temporarily stay the exercise of early termination rights that may otherwise be triggered upon entry of a firm into resolution or in connection with the use of resolution powers (see Key Attribute 4.3 and Annex IV);

69 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) General powers of resolution authorities (xi) Impose a moratorium with a suspension of payments to unsecured creditors and customers (except for payments and property transfers to central counterparties (CCPs) and those entered into the payment, clearing and settlements systems)...

70 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) General powers of resolution authorities (xi)... and [impose] a stay on creditor actions to attach assets or otherwise collect money or property from the firm, while protecting the enforcement of eligible netting and collateral agreements;

71 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) Temporary stay of close-out rights The stay should: (i) be strictly limited in time... ; (ii) be subject to adequate safeguards that protect the integrity of financial contracts and provide certainty to counterparties... ; [Section 4.3]

72 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) Temporary stay of close-out rights and (iii) not affect the exercise of early termination rights of a counterparty against the firm being resolved in the case of any event of default not related to entry into resolution or the exercise of the relevant resolution power... (for example, failure to make a payment, deliver or return collateral on a due date). [Section 4.3]

73 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution Financial Stability Board (FSB), Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) CPSS-IOSCO, Recovery and resolution of financial market infrastructures (Consultative Draft, July 2012)

74 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution CPSS-IOSCO, Recovery and resolution of financial market infrastructures (Consultative Draft, July 2012) Because the traditional bankruptcy process does not have the preservation of financial stability as an objective and could cause a systemic disruption through delays or cessation of an FMI s critical functions, it is necessary to also have a resolution regime available for use on FMIs. [Section 2.7]

75 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution CPSS-IOSCO, Recovery and resolution of financial market infrastructures (Consultative Draft, July 2012) [A] resolution regime covering FMIs should be incorporated in law and appropriately implemented by conferring legal powers on a designated resolution authority to ensure the continuation of an FMI s critical operations and services in circumstances where the preconditions for resolution have been satisfied. [Section 2.8]

76 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution CPSS-IOSCO, Recovery and resolution of financial market infrastructures (Consultative Draft, July 2012) This regime should seek to ensure the timely completion of payment, clearing and settlement obligations even on the day that an FMI enters such a regime, pending either (a) the restoration of the FMI s ability to provide those services as a going concern; or... [Section 2.7]

77 Recovery and Resolution (Bankruptcy) Issues o International standards for infrastructure recovery and resolution CPSS-IOSCO, Recovery and resolution of financial market infrastructures (Consultative Draft, July 2012)... (b) the provision of those services by some alternative mechanism by, for example, arranging for the orderly transfer of those functions to another FMI or bridge institution, or by providing participants sufficient time to establish and to move to an alternative arrangement. [Section 2.7]

78 Concluding Thoughts... Market infrastructure is on the cusp of change. The financial crisis propelled regulators worldwide to find ways to improve market transparency, reduce systemic risk and drive down trading costs.... Morgan Stanley & Oliver Wyman, The Future of Capital Markets Infrastructure (February 16, 2011)

79 Concluding Thoughts...

80 Mandatory Central Clearing and Financial Reform o Central counterparty clearing what are the implications? o The Group of Twenty (G-20) clearing mandate National legislation in Japan, the U.S. and E.U. o Policy considerations Costs and benefits (generally) Unintended consequences, competitive implications, regulatory fragmentation, etc. Intensive regulation and the need for extensive regulatory coordination, etc. Recovery and Resolution (Bankruptcy) Issues o Collective action problems in bankruptcy Policy responses and safe harbors for financial contracts (U.S. law) o Orderly liquidation for systemically important financial companies (U.S. law) o International standards for infrastructure recovery and resolution Financial Stability Board (FSB), Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011) CPSS-IOSCO, Recovery and resolution of financial market infrastructures (Consultative Draft, July 2012) Concluding Thoughts...

81 Central Clearing, Systemic Risk and Bankruptcy Issues Presentation to the Futures Industry Association Japan Robert S. Steigerwald Federal Reserve Bank of Chicago November 7, 2012 The statements and opinions expressed herein are solely those of the author and not necessarily those of the Federal Reserve Bank of Chicago or the Board of Governors of the Federal Reserve System.