The Principles for Financial Market Infrastructures published in 2012 established the foundation for the international community to strengthen and preserve financial stability.[1] As CCPs have become systemically important for the markets they clear and, through their interdependencies, for the financial system as a whole, the CPMI and IOSCO issued additional guidance in the following years on how to implement the standards to enhance CCP safety and soundness.

Resilience, recovery and resolution are the three pillars for CCP risk management standards.


The regulatory requirements introduced by the global standard setters aimed to improve and ensure CCPs financial resilience at all times. CCPs must maintain pre-funded resources to cover the default of the two biggest clearing members under extreme but plausible extreme scenarios, maintain capital requirements to protect itself against the risk of non-default losses, and apply concentration limits to contain investment and custody losses.

To assess the solvency of their risk management frameworks, CCPs regularly test the key aspects of their default procedures to ensure that all clearing members have appropriate arrangements in place to respond to a default event. These tests include:

  • Stress scenarios: Connect regulatory requirements with a comprehensive set of historical and hypothetical scenarios with a significant probability to incur. Different asset classes and products are tested independently, with the relevant risk factors being calibrated accordingly;
  • Liquidation testing: Measure the ability of CCPs to absorb settlement and funding flows. These costs include the cost of hedging a defaulting member’s positions and adverse market movements, reducing its value prior to closing out or selling those positions;
  • Sensitivity testing: Analyse how the different values of a set of independent variables − the key parameters and assumptions of the initial margin model − are affected at a number of confidence intervals in order to determine its sensitivity to calibration errors;
  • Reverse stress testing: Identify the market conditions under which the Default Waterfall framework would provide insufficient coverage, rendering the CCP unviable.


In case of uncovered default losses beyond a CCP’s pre-funded resources in the Default Waterfall, CPMI-IOSCO published the Recovery of Financial Market Infrastructures in 2017, a revised version of their 2014 guiding principles for FMIs on how to develop and implement recovery plans to enable them to recover from threats to their viability and financial strength.

CCPs should retain the flexibility to implement their default management process (DMP) before entering recovery, and their recovery plans before entering resolution, ultimately avoiding in any case the use of public funds, with recovery and resolution arrangements maintaining incentives to ensure resilience in the business-as-usual situation.

Once all the pre-funded resources in the Default Waterfall have been depleted without the default being fully resolved, the CCP should then enter into the recovery regime, where it possesses a series of measures agreed ex-ante to fairly allocate the remaining losses among members. The inherent differences across asset classes, markets and jurisdictions prevent a ‘one-size-fits-all’ approach. CCPs are responsible for implementing their own recovery plans while being monitored by their respective supervisory authorities. Some of the recovery tools CCPs have at hand include:

  • Cash assessments: Pre-defined cash assessments, also called cash-calls, are additional contributions from participants generally linked to their share in the pre-funded default fund or their own aggregate level of activity at the CCP;
  • Gains Haircutting (VMGH/IMGH): Haircutting of claims can be applied to IM, VM or marked-to-market gains. This tool involves a reduction in the total amount owed to each non-defaulting participant with an in-the-money position;
  • Forced loss allocation: If the CCP has positions remaining it cannot allocate through voluntary means, forced loss allocation allows the CCP to distribute losses across all clearing members on a pro-rata basis based on their share in the pre-funded default fund or to their own aggregate level of activity at the CCP;
  • Partial/Full tear-ups: Tear-ups are another tool available for CCPs after all voluntary tools have proven unsuccessful. It involves terminating some (usually those belonging to smaller, illiquid market segments) or all open positions in order to return to a matched book.


The resolution regime would only be triggered if a CCP is unable to implement its recovery plan or where the implementation of the recovery plan may negatively affect financial stability. A resolution plan should be tailored to the specificities of the CCP at risk, which includes its structure, products and market conditions, with the primary goal of either ensuring the continuity of critical services or conducting a wind-down without resorting to a government bailout.

The Key Attributes of Effective Resolution Regimes for Financial Institutions set the scope for resolution authorities to intervene and implement the resolution measures according to the resolution planning. Resolution shall only be initiated when an FMI is no longer viable (or likely to be no longer viable) and has no reasonable prospect of becoming so.

Some of the resolution tools that the resolution authorities have available, include:

  • Transfer of assets to third-party: Resolution authorities have the power to transfer the assets and liabilities of the failed CCP to a third-party or to a bridge institution that can continue operating certain critical functions and viable operations of the failed CCP;
  • Recapitalisation: Recapitalisation (forced) would lead to shareholders exposing funds to avoid insolvency in exchange for pro-rata ownership;
  • Bail-in within resolution: Powers to carry out bail-in should allow resolution authorities to write down creditor claims to the extent necessary to absorb the losses or to convert creditor claims into equity.

Additionally, the resolution authorities may decide to use the recovery tools available as long as the no creditor worse off principle is respected, where creditors have the right to compensation where they do not receive at a minimum what they would have received in a liquidation of the firm.