OTC Derivatives Regulation - White Paper - ISDA - Principles for CCP Recovery - November 2014
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Key principles from the white paper:
- Transparent risk management standards, practices and methodologies: The practices, standards and methodologies used by CCPs to size their loss-absorbing resources, which include initial margin (IM), default-fund (DF) contributions and CCP ‘skin in the game’ (SITG), need to be transparent to market participants.
- Mandatory, standardized and transparent stress testing: CCP risk management methodologies and frameworks should be regularly tested and assessed using regulatory driven standardized and transparent stress-test criteria to assure market participants they are adequate.
- Significant CCP SITG: CCPs’ contributions to the loss-absorbing resources pool should incentivize robust risk management, align CCP management incentives with those of the clearing members (CMs), and be fully funded, material and substantial.
- Clearly defined CCP recovery plans: Ensuring the continuing operation and restoring the viability of a failed CCP is less disruptive and costly, and therefore preferable, to its liquidation or full contract tear-up. Toward this end, CCP recovery mechanisms should be clearly defined and transparent; they should be pursued as long as the CCP default management process (DMP) is effective. Where CCP rules provide for cash calls to CMs, they should be limited, capped and fully transparent. Loss-allocation tools should only be considered if they are rules-based, clearly agreed upon and in place, and are economically viable for all categories of clearing participants.
- Clearing service termination or resolution: Recovery efforts should only be undertaken as long as the DMP is effective and the clearing service is viable. If the DMP has failed and/or further recovery efforts to re-establish a matched book are either ineffective, unfeasible or create systemic instability, then the CCP is faced with the prospect of considering the closure of the clearing service. It is likely that, at this point, the resolution authorities will be evaluating which course of action is most effective.