Member states have agreed an approach to address systemic risks stemming from certain key financial market infrastructures.
EU ambassadors today approved the Council’s position on a proposed framework for clearing houses and their authorities to prepare for and deal with financial difficulties. They invited the presidency to start negotiations with the European Parliament as soon as possible.
The proposed rules aim at providing national authorities with adequate tools to manage crises and to handle situations involving failures of central counterparties (CCPs). They build on the same principles as the recovery and resolution framework applying to banks. The main objectives of the reform are to preserve clearing houses’ critical functions, to maintain financial stability, and to prevent taxpayers from bearing the costs associated with the restructuring and the resolution of failing clearing houses.
Clearing houses are an essential part of the architecture of financial markets. They are designed to make the financial system safer, but they can also fail. Setting out EU-wide rules for their recovery and resolution will help to address interconnectedness and contagion risks, while encouraging less risky behaviour by clearing houses and other market participants.
Mika Lintilä, Finnish minister of finance
CCPs facilitate securities and derivative transactions by centralising and standardising all the steps leading up to payment. They play a critical role in ensuring the stability of financial markets as they take on counterparty risk by stepping in between the seller and the buyer and providing guarantees that the transaction can be completed.
CCPs process important and ever-increasing volumes of derivatives trades every day. At the moment, 16 CCPs are established and authorised in the EU. They clear a significant proportion of the EUR 640 trillion of OTC derivatives currently held globally.
The proposed framework takes into account the global and systemic nature of CCPs. It provides for close coordination between national authorities in the framework of “resolution colleges” in order to ensure that resolution actions are applied in a coherent manner taking into consideration the impact on affected stakeholders and financial stability.
The Council’s position sets out a 3-step approach:
- First, the framework will be based on prevention and preparation. CCPs and resolution authorities are required to draw up recovery and resolution plans on how to handle any form of financial distress which would exceed a CCP’s existing resources. If resolution authorities identify obstacles to resolvability in the course of the planning process, they can require a CCP to take appropriate measures.
- Supervisory authorities have the possibility to intervene at an early stage, i.e. before the problems become critical and the financial situation deteriorates irreparably. For example, they can require the CCP to undertake specific actions in its recovery plan or to make changes to its business strategy or legal or operational structure.
- Finally, in the unlikely case of a CCP failure, national authorities can use resolution tools. These include the use of write-down of instruments of ownership, a cash-call to clearing members, the sale of the CCP or parts of its business or the creation of a bridge CCP. While in certain limited cases, extraordinary public support may be provided as a last resort, the purpose of resolution actions is to minimise the extent to which the cost of a CCP’s failure is borne by taxpayers, while ensuring that shareholders bear an appropriate part of the losses.
The Council suggests that the new framework starts applying two years after the date of entry into force of the regulation to allow time to adopt all implementing measures and for market participants to take the necessary steps to comply with the new rules.
The European Parliament established its first reading position on this file in March 2019. Trilogue negotiations are therefore ready to start as soon as possible.