Chapter News

Strengthening Europe’s financial system and protecting taxpayers

The Commission proposes new EU rules for the recovery and resolution of Central Counterparties (CCPs) which are critical in managing risks throughout the financial system. Emphasis is given to preparation and prevention, early intervention and resolution.

The European Commission has today proposed new rules to ensure that systemic market infrastructures in the financial system, known as Central Counterparties (CCPs), can further increase stability in financial markets.

A Central Counterparty acts as the intermediary to both sides of a transaction in a financial instrument, including bonds, equities, derivatives and commodities (such as agricultural products, oil and natural gas). They are critical in helping to reduce risks and interconnections through the financial system. A large proportion of the EUR 500 trillion of derivatives contracts that are outstanding globally are cleared by 17 Central Counterparties across Europe.

The financial crisis clearly illustrated that the failure of an important financial institution can cause critical problems for the rest of the financial system and can negatively impact growth across the wider economy. It is important that authorities in Europe have the powers to step in were a CCP to fail, and deal with it in an orderly manner.

The proposed rules for Central Counterparties set out provisions comparable to those in the recovery and resolution rules for banks (Bank Recovery and Resolution Directive) and are based on international standards.

Key elements of the proposal

Preparation and prevention

The proposed rules require Central Counterparties to draw up recovery plans which would include measures to overcome any form of financial distress which would exceed their default management resources and other requirements. Authorities responsible for resolving CCPs (i.e. resolution authorities) are required to prepare resolution plans for how CCPs would be restructured and their critical functions maintained in the unlikely event of their failure.

Early intervention

Early intervention will ensure that financial difficulties are addressed as soon as they arise and problems can be averted. Central Counterparties supervisors are granted specific powers to intervene in the operations of Central Counterparties where their viability is at risk but before they reach the point of failure or where their actions may be detrimental to overall financial stability.

Resolution powers and tools

In line with the guidance of the Financial Stability Board, a Central Counterparty will be placed in resolution when it is failing or likely to fail, when no private sector alternative can avert failure, and when its failure would jeopardise the public interest and financial stability. In addition, it could be placed into resolution where the use of further recovery measures could compromise financial stability even when the conditions above are not met.

Cooperation between national authorities

CCPs are cross border in nature, with the biggest CCPs operating internationally. It is important that authorities cooperate across borders to ensure effective planning and orderly resolution if needed. The proposal establishes so-called resolution colleges for each CCP containing all the relevant authorities including the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA).

Compliments of the European Commission