Enhancing CCP Resilience Overview of International Workstreams SEMINAR ON FINANCIAL MARKET INFRASTRUCTURES - DEVELOPMENTS AND CHALLENGES JENNIFER LUCIER, FEDERAL RESERVE BOARD JANUARY 9, 2017 1
Agenda Key international groups Key, selected accomplishments CCP Workplan Overview Resilience and recovery workstreams Resolution workstreams CPMI-IOSCO Guidance on CCP resilience Governance Stress testing DISCLAIMER: The views expressed in this presentation reflect those of the author only and do not necessarily reflect the views of the Board of Governors or any other staff in the Federal Reserve System. 2
Key international groups Committee on Payments and Market Infrastructures (CPMI) International Organization of Securities Commissions (IOSCO) Financial Stability Board (FSB) Basel Committee on Banking Supervision (BCBS) CPMI-IOSCO Steering Group (SG) Supervisory & Regulatory Cooperation Committee (SRC) Resolution Steering Group (ReSG) Policy Standing Group (PSG) Implementation Monitoring Standing Group (IMSG) Banks (CBCM) Insurers (icbcm) FMIs (fmicbcm) CBCM = Cross-Border Crisis Management Group 3
2008 financial crisis Key accomplishments Launch effort to harmonize international risk management standards for FMIs January 2010 September 2009 G20 Summit (Pittsburgh) Publication of the Principles for Financial Market Infrastructures (PFMI) April 2012 October 2011 Publication of Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes or KAs) CPMI-IOSCO (selected workstreams) Publication of the PFMI Assessment Methodology and Disclosure Framework December 2012 Publication of Recovery of financial market infrastructures, provides guidance on recovery planning October 2014 October 2014 Publication of the 2011 KAs plus sector-specific annexes, including one for FMIs April 2015 Chairs of ReSG, SRC, BCBS, CPMI, and IOSCO issue 2015 CCP Workplan FSB (selected workstreams) PSG surveys over 30 CCPs on the 5 resilience and recovery topics in the Workplan IMSG surveys 10 global derivatives CCPs for first Level 3 assessment Summer 2015 July 2015 BCBS, CPMI, FSB, and IOSCO form joint study group on central clearing interdependencies SG tasks PSG with developing a framework for supervisory stress testing of CCPs April 2016 November 2015 ReSG creates fmicbcm CBCM advances work on continuity of access to FMIs for banks in resolution Publication of the Level 3 assessment Report on the financial risk management and recovery practices of 10 derivatives CCPs Publication of a consultative report on Resilience and recovery of central counterparties (CCPs): Further guidance on the PFMI August 2016 August 2016 Publication of a consultative discussion note on the Essential Aspects of CCP Resolution Planning 4
CCP Workplan: Overview Issued in April 2015, by the Chairs of the FSB SRC, FSB ReSG, BCBS, CPMI, and IOSCO Scope: CCPs that are systemically important in multiple jurisdictions The CCP Workplan sets out broad principles for international coordination among the relevant committees and three substantive priorities Resilience Recovery CPMI-IOSCO are primarily responsible for carrying out this work, regular interaction with the FSB SRC or FSB ReSG Resolution FSB ReSG is carrying this work forward through its fmicbcm in close collaboration with CPMI-IOSCO In addition, the Chairs commissioned a study to better understand the interdependencies among CCPs and their direct (and indirect) members Joint ad hoc working group chaired by the Board with representation from BCBS, CPMI, and IOSCO Task: Quantify, where possible, the interconnections between CCPs and clearing members, mapping globally in terms of both common memberships and common service provision Analyze potential contagion effects 5
CCP Workplan: Resilience and Recovery CPMI-IOSCO have advanced three different workstreams regarding CCPs 1. Consultative report on CCP resilience and recovery Responses to the stock-taking exercises indicated the need for further guidance in several areas as well as a need for further observance with the PFMI, as written Credit stress testing programs are further developed than liquidity stress testing programs CCP margin practices are generally developing in accordance with the expectations in the PFMI however results also highlighted areas where further clarification or emphasis could be beneficial Observance with the existing coverage requirements (e.g. cover 1 or cover 2) varies Recovery planning by global CCPs is more advanced than other CCPs, however recovery planning is generally viewed as insufficient and incomplete at this time CCPs approaches to contributing to default and non-default losses, often referred to as skin-in-the-game practices, vary across jurisdictions Consultative report provided further guidance on the PFMI in 6 key areas: governance, stress testing (credit and liquidity), margin, coverage requirements for financial resources, CCP contributions to default and non-default losses, and recovery planning Final guidance to be published in first half of 2017 6
CCP Workplan: Resilience and Recovery 2. PFMI implementation The IMSG surveyed 10 derivatives CCPs on financial risk management and recovery practices to assess the consistency of the outcomes of their collective, not individual, implementation of the PFMI CCPs have made important progress implementing the PFMI but gaps and shortcomings exist in key areas related to their resilience and recovery Next steps First half of 2017, the IMSG expects to conduct a targeted, follow-up review on areas with most serious issues of concern: recovery planning, coverage of financial resources on an ongoing basis, and liquidity-specific scenarios in stress testing frameworks 3. Supervisory stress testing framework CPMI-IOSCO launched a workstream in 2016 with the aim of developing a draft framework in the first half of 2017 7
CCP Workplan: Resolution The FSB is making progress on CCP resolution Publication of consultative discussion note o The FSB ReSG recently sought public comment on a number of aspects of CCP resolution planning: o Timing of entry into resolution Adequacy of financial resources Tools for returning to a matched book and allocating default and non-default losses Application of the No Creditor Worse Off safeguard and treatment of the CCP s equity in resolution Cross-border cooperation and effectiveness of resolution actions Issues regarding resolution strategies and the effect on incentives of various stakeholders are also under consideration Next steps Upon consideration of the comments and additional analysis, ReSG plans to publish for consultation more granular guidance in early 2017 The aim is to issue final guidance by the July 2017 8
CPMI-IOSCO Guidance: Governance PFMI Principle 2 sets forth expectations for an FMI s governance arrangements, including: Documented arrangements that provide clear and direct lines of responsibility and accountability (Key Consideration 2) Clearly specified roles and responsibilities for the FMI s board of directors (or equivalent) (Key Consideration 3), including an explicit responsibility to establish a clear, documented risk management framework (Key Consideration 6) and ensure that the FMI s design, rules, overall strategy, and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders (Key Consideration 7) The consultative report provided more granular guidance in each of these areas, placing greater emphasis on the role of the board of directors in CCP risk management specific responsibilities include: Ensuring that the CCP s margin system and stress-testing framework are designed to set and maintain on an ongoing basis the required level of financial resources Ensuring that prompt correction action is taken if the CCP is not, or is at material risk, of not meeting its financial resource (coverage) requirement Assessing and limiting to the extent practicable and prudent destabilizing, procyclical changes in the overall quantity of financial resources collected from direct participants Ensuring the review and validation of the margin system and stress-testing framework, conducted at least annually Establishing a comprehensive disclosure and feedback mechanism for soliciting views from direct participants, indirect participants, and other relevant stakeholders to inform the board s decision making regarding the margin system, stress testing methodology, and stress-testing results 9
CPMI-IOSCO Guidance: Stress Testing PFMI Principles 4 and 7 set forth expectations regarding stress testing for credit and liquidity risk, respectively For credit stress tests, the PFMI calls for a CCP to determine the amount and regularly test the sufficiency of it total financial resources available through rigorous stress testing (Principle 4, Key Consideration 5), considering a wide range of relevant stress scenarios (Principle 4, Key Consideration 6) For liquidity stress tests, the PFMI establishes an expectation for an FMI to determine the amount and regularly test the sufficiency of it liquid resources through rigorous stress testing, taking into account the design and operation of the FMI, including all entities that might pose material liquidity risks to the FMI, and, where appropriate, covering a multiday period (Principle 7, Key Consideration 9) The consultative report emphasizes the importance of CCPs conducting distinct but consistent stress tests for credit and liquidity risk. More granular guidance is provided on the following: The structure of credit and liquidity stress testing frameworks Identification of credit and liquidity risks, including sources of these risks Development of extreme but plausible scenarios, including guidance on their comprehensiveness, use of historical data and different price and position movements, and development of forward-looking scenarios Calculation and aggregation of stress test results 10