The FSB Guidance on Financial Resources to Support CCP Resolution Encounters Opposition from Former CFTC Chairman

Earlier this week, we informed that the FSB had published a new guidance focused on financial resources to support CCP resolution and on the treatment of CCP equity in resolution. The proposed guidance has encountered strong opposition from the former chairman of the US Commodity Future Trading Commission (CFTC) Christopher Giancarlo.

On a piece published at on Thursday 21th May, Mr Giancarlo questioned both the responsibility of the FSB in dictating resolution procedures regarding the appointment of losses in resolution, and the time to influence the treatment of CCP equity in resolution, with global CCPs currently focused on managing the economic implications of Covid-19.

Regarding the first part of the guidance, Mr Giancarlo depicted the work already initiated and accomplished by the CFTC: “The work started with comparisons of US and UK legal frameworks for clearing house resolution and approaches to common problems. Staff analysed their respective rule books and diverse approaches for resolving CCPs. Later, we considered hypothetical default and non-default loss scenarios and resolution strategies to address them, as well as continuity of access to clearing houses for major global banks in resolution.”

About the treatment of CCP equity in resolution, it is noted how CCP shareholders absorbing all losses would clash against the no creditor worse off in liquidation (NCWOL) safeguard set out in the key attributes. “The determination of whose resources, in contrast to the question of the quantity of resources, is more a matter of commercial winners and losers than it is a matter of systemic risk. These are decisions about which group of stakeholders bears what proportion of the economic cost of allocation of risk and loss. As such, they are inherently political decisions, with political ramifications, and not ones the FSB should be making. […] They can only be made by national regulators operating under political supervision,” he added.

The former CFTC Chairman reminded the political accountability of local regulators towards the national legislative body, thus making them rule-makers instead of rule-takers. Additionally, he recapitulated on the achievements of the CFTC since the G20 mandate in 2008, including global cooperativeness with financial regulators, central banks, resolution authorities and recommendatory bodies, the development of default management, recovery, and resolution scenarios tailored to the unique clearing house business model, and extraordinary crisis management.

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