On June 23rd, the Presidency of the Council and the European Parliament reached a deal on a common set of rules for central counterparties (CCPs) and their authorities to prepare for and deal with financial difficulties.
The proposed framework, built on the same principles as the recovery and resolution framework applying to banks, strives to reduce the probability of CCP failure by introducing a balanced incentive structure for proper risk management, to preserve CCPs’ critical functions and to maintain financial stability in case of difficulties, thus limiting the potential repercussions on taxpayers’ money.
The recovery and resolution framework will be based on a 3-step approach:
- First, a prevention and preparation phase to draw up recovery and resolution plans on how to handle any form of financial distress which would exceed CCPs existing resources.
- Second, a recovery phase where CCPs can take recovery measures according to certain viability indicators and based on the prepared recovery plan, including cash calls, margin haircutting and the use of CCP’s own resources. This phase also introduces early intervention arrangements for supervisory
- Last, a resolution phase in the unlikely case of a CCP failure, where authorities would resort to resolution tools such as the (partial) termination of the CCP’s contracts, the write-down of CCP capital, the sale of the CCP or parts of its business or the creation of a bridge CCP.
Following the finalisation of technical work, the political agreement will be submitted for endorsement by Member States’ ambassadors to the EU. The new framework will start applying 18 months after the date of entry into force of the proposed regulation.
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