The CPSS-IOSCO Principles for Financial Market Infrastructure Andreas Schönenberger

Transcription

1 The CPSS-IOSCO Principles for Financial Market Infrastructure Andreas Schönenberger FED-IMF-WB conference Washington, 6 June 2012

2 1. Background: OTC derivatives reforms 2. Overview of (some) new requirements 3. Credit and liquidity risk: some specific issues relating to CCPs

3 1. Background: OTC derivatives reforms

4 OTC Derivatives International Workstreams Timeline Action Responsible Completed by Reporting metrics ODSG/ODWG Ongoing g Minimum data reporting requirements CPSS and IOSCO January 2012 Trade repository access CPSS and IOSCO Ongoing Report on trading of OTC derivatives IOSCO February 2011 Central bank liquidity and CCPs ECC Advisory Group Ongoing Report on macro-financial implications of alternative configurations for access to CCPs Regulatory capital adequacy rules for capitalisation of bank exposures to CCPs Report on international standards to address coordination of central clearing requirements CGFS September 2011 BCBS December 2010 consultative report Ongoing IOSCO January 2012 Standards d for FMIs CPSS and IOSCO 16 April 2012 Margin Requirements for non-centrally cleared OTC derivatives BCBS-IOSCO-CPSS- CGFS June 2012 Consultative report Assessing progress in implementation ODWG Ongoing Comparing bilateral and central clearing ODCG Ongoing

5 2. Overview of (some) new requirements

6 New requirement Principle 4: Distinction between current exposures and PFEs Credit risk Full coverage of all exposures with high degree of confidence Specific requirements for DNS with and without settlement guarantee Greater emphasis on crisis scenarios especially for CCPs Reference to exposure of all affiliated entities of same group Contingency planning for uncovered credit losses Principle 7: Liquidity risk Greater clarity on range of eligible funding arrangements Greater emphasis on crisis scenarios Reference to different roles of defaulter including as liquidity provider Key discussion issues Does the FMI have enough collateral? How to estimate potential future losses? What stress scenarios? Normal versus extreme condition: margins versus other resources? Separate default funds? What funding arrangements are eligible (only committed or more)? Multiple roles of participants Role of central bank facilities?

7 Principle 6: Margin Principle 5: Collateral New requirement Initial margin to cover not only normal market conditions From quarterly to monthly sensitivity analysis, daily back-testing, annual methodology testing Avoid concentration risk Avoid procyclicality Avoid wrong-way risks Higher quality Key discussion issues Does the FMI have the right margining methodology? What and how frequent back testing, stress testing, model testing? Initial margin also to cover extreme e e losses? What type of collateral, e.g. government debt? How to reconcile trade off as regards procyclicality? Does the FMI have the right collateral? How much can/should wrong- way risk be avoided?

8 Principle Purpose Key discussion points Pi Principle i 14: Protect t indirect participants i t What model of segregation, at Segregation and the level of CCP or participant? portability Other equivalent models? Principle 15: Business risk Principle 19: Tiered participation Increased importance following mandatory clearing Recognise the fact that FMIs may fail and create systemic disruptions not only as a result of member default, but also as a result of non-default related risks Identify and address any risks that that the FMI may face from indirect participants What form of portability (relevant for capital requirements)? What types of non-default related business risks? What ongoing quantitative requirement (at least 6 months)? What liquid composition? How far down the chain of tiering? FMIs as quasi-regulators?

9 Principle Principle 3: Comprehensive risk management Principle 18: Access and participation requirements Principle 20: FMI links Responsibility E: Cooperation between authorities Purpose Need for a holistic risk management view FMIs should address risks to and from other FMIs Facilitate expanded direct access without compromising the safety of the FMI (CGFS report) More specific and demanding requirements on different types of links Strengthening the need for cross-border cooperation between authorities 3

10 3. Credit and liquidity idit risk: some specific issues relating to CCPs

11 Credit risk default of largest participant(s) Viability of a CCP critically depends on its ability to withstand stressed market conditions. Ability to cope with default of largest participant has traditionally served as minimum requirement to this end. Not an easy concept: PFMIs expect CCPs to withstand default of all participants with high degree of confidence. Moreover, default of largest participant as such is meaningless unless the CCP s exposures to that participant are known, which in turn depends on many different factors. Adequate stress testing needs to consider more than just this particular scenario. Still, it is a useful concept because it aims at mitigating contagion risk: no matter which participant defaults, it will not spill over to other participants because the CCP can handle it. Moreover, it is a well-established and tangible criterion that is relatively easy to implement. Any attempt to raise the bar naturally focuses on this minimum requirement.

12 Credit risk default of largest participant(s) Need for moving from cover 1 to cover 2 : different views EU (and others) believe cover 2 is an extreme, but plausible scenario. The financial crisis has demonstrated the need for a significant raising of the bar. Moving to cover 2 it is the most effective and noticeable wayof doing so. It has been established for all CCPs as minimum requirement in EMIR. Other countries have been more cautious for a number of reasons: lack of convincing impact analysis. Fear of legal challenge: not even cover 1 has been tested in reality, so what is the justification for going further? Some CCP have highly concentrated membership: cover 2 is almost cover all. PFMI compromise: cover 2 for CCPs with more-complex risk profile or CCPs that are systemically important in multiple jurisdictions; cover 1 for all other CCPs. EMIR: non European CCPs will be recognised only if they are subject to rules EMIR: non-european CCPs will be recognised only if they are subject to rules that are equivalent to EMIR

13 Liquidity risk eligible funding arrangements Contrary to previous standards, the importance of liquidity risk has now been fully recognised by establishing a principle on liquidity risk Previous thinking: combination of adequate amount of collateral and adequate quality of collateral (low liquidity risk) sufficiently addresses liquidity risk Importance of adequate funding arrangements has only been fully understood in the course of the review process: need for arrangements that ensure reliably the transformation of non-cash collateral into cash Different views: committed credit lines are most reliable; however, they are not always fully reliable; moreover risk of contagion especially in the case of commitments by participants; finally high regulatory cost PFMI compromise: wider set of eligible arrangements provided they are readily available and reliably convertible into cash (see Principle 7, KC5) Recognition of central bank services: when available, FMIs should use them, but not assume availability of emergency central bank credit