Now is not the time to change the rules on CCP resolution

FSB overstepping brief by putting CCP operators’ equity on the hook in resolution, writes former CFTC chair


Earlier this month, the Financial Stability Board published proposed guidance directing national authorities in resolving central counterparty clearing houses (CCPs) in the event of a CCP failure. Specifically, it has called for CCP shareholders to be exclusively responsible for absorbing all losses in a resolution scenario. I believe that is the wrong call, and the wrong time to make it.

As former chairman of the US Commodity Futures Trading Commission, who led the process of refining recovery and resolution protocols for CFTC-regulated CCPs, I believe that now is not the time, and the FSB is not the appropriate body, to dictate resolution procedures for CFTC-regulated CCPs and treatment of their equity in resolution.

Decisions about the apportionment of losses in resolution are important and necessary. Yet 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 – these are decisions of “whose ox gets gored”.

As such, they are inherently political decisions, with political ramifications, and not ones the FSB should be making.

Now is also not the time to direct recalibration of CCP financial resources in resolution. Doing so raises unwarranted questions about CCPs’ ability to continue weathering the current economic storm. Guiding the realignment of incentives of CCPs and their members at a time of extreme market stress could lead to unexpected and possibly risky calculations of moral hazard among CCP members.

In the aftermath of the financial crisis, the CFTC stepped up to its duty as lead supervisor of US derivatives clearing houses by continually enhancing its oversight and examinations processes, margin modelling and testing capability, and quantitative analytical proficiency.

Successive agency chairmen have made clear that, while acting collaboratively with international standard-setting bodies, the CFTC will always remain a rulemaker, not a ruletaker, in fulfilling its Congressionally mandated duties. This is appropriate at a time of renewed focus on national sovereignty in Europe and the US by policy-makers and their popular electorates.

The current crisis has revealed the sturdy risk resilience of CFTC-regulated CCPs and the crisis management capability of their supervisors. The defences of central clearing were not found wanting

Chris Giancarlo, Willkie Farr & Gallagher

The Covid-19 pandemic has caused unprecedented, worldwide market disruption. As a result, CCPs have seen their defences tested. But the current crisis has revealed the sturdy risk resilience of CFTC-regulated CCPs and the crisis management capability of their supervisors. The defences of central clearing were not found wanting.

Against such a backdrop, the FSB has chosen to issue its guidance for CCPs in resolution. It has two parts.

First, there are steps to guide national authorities in assessing the adequacy of CCP financial resources and potential financial stability implications of their use. It calls on authorities to: identify hypothetical default and non-default loss scenarios that may lead to a resolution of a CCP; conduct qualitative and quantitative evaluations of existing resources and tools for CCP resolution; assess potential resolution costs; compare existing resources and tools for resolution; and evaluate the availability, costs and benefits of addressing any gaps in such tools.

Chris Giancarlo, Willkie Farr & Gallagher

The CFTC has already initiated and accomplished most of this work. Dodd-Frank assigns the Orderly Liquidation Authority for a failed systemically important clearing house (a Sidco) to the Federal Deposit Insurance Corporation (FDIC). Under my chairmanship, the CFTC recognised and embraced this authority, worked collaboratively with counterparts at the FDIC to better its understanding of derivatives clearing, including default management and recovery, and extreme tail scenarios. The work included the development of resolution scenarios tailored to the unique clearing house business model.

As a result, the CFTC and FDIC are today much better prepared to respond to the unlikely event of a failure of a systemically important US clearing house.

In addition, the CFTC engaged in regular multilateral discussions with colleagues from the Federal Reserve, the FDIC, the Securities and Exchange Commission (SEC) and the Bank of England, examining hypothetical failure and recovery and resolution of Sidcos.

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.

This comprehensive review was initiated on the CFTC’s own volition and authority, and not pursuant to the guidance of any international body. Yet, at the same time, the CFTC participated actively in work on CCP resolution at the FSB, the International Organization of Securities Commissions and other international bodies. The CFTC co-led, along with the FDIC, crisis management groups for CME Group and Ice Clear Credit, to aid in co-ordination with authorities in other jurisdictions that consider these CCPs systemically important.

The CFTC was a leader in the important work of international standard-setting and systemic risk authorities concerning derivatives clearing. That work included the FSB promulgation of the financial market infrastructures annexe to the Key Attributes in October 2014, and the Guidance on CCP Resolution and Resolution Planning in July 2017. Similarly, the CFTC contributed to Committee on Payments and Market Infrastructures-Iosco guidance on CCP recovery in 2014, which was updated in 2017.

Skin in the game

The second part of the FSB’s recent guidance addresses the treatment of CCP equity in resolution. It provides a framework for resolution authorities to evaluate the exposure of CCP equity to losses in recovery, liquidation and resolution. It instructs resolution authorities to direct the allocation of CCP losses in resolution to the CCPs, rather than their participants.

In so doing, the guidance goes beyond quantifying what amount of resources in aggregate should support CCP resolution, and determines whose resources must support it. The guidance comes down affirmatively in favour of CCP shareholders exclusively absorbing all losses in resolution, notwithstanding the principle of “no creditor worse off in liquidation” set out in the key attributes. The guidance conclusively favours CCP clearing members over the CCPs themselves.

As I’ve said, these questions are important – but determinations of substantially diverse commercial and shareholder impact are inappropriate for the FSB, which has little political oversight or electoral accountability. They can only be made by national regulators operating under political supervision. Unelected, international bodies such as the FSB are ill-suited to playing King Solomon and dividing the baby between such diverging interests.

Moreover, the FSB is particularly over-representative of central banks, themselves largely unaccountable to political oversight, and finance ministries that do not oversee significant derivatives clearing. Neither can it be readily presumed to give a fair hearing to the interests of CCP equity holders, especially in the eyes of domestic legislatures and electorates wary of unelected international bodies.


It is noteworthy that the FSB does not include as voting members either the CFTC or the FDIC, the respective supervisor and resolution authority of most of the world’s largest CCPs handling the overwhelming preponderance of the world’s exchange-traded and over-the-counter cleared derivatives.

Yet both the CFTC and FDIC are subject to direct political accountability to both the elected legislative and executive branches of the US government. Their authority, fully accountable to elected political bodies, should be predominant in the question of allocation of CCP losses in resolution. The agencies must remain rulemakers, not ruletakers.

When the Group of 20 met in Pittsburgh in 2009, not a single delegate could have imagined the series of extreme and prolonged market conditions in which CCPs are now operating. Never in the history of markets have derivatives clearing houses faced challenges simultaneously exogenous and market-driven as they do today, arguably to a worse degree than if the September 11th attack and the market-driven financial crisis 2008 were happening simultaneously.

And yet the world’s major CCPs persevere. They are accomplishing what the Pittsburgh leaders intended them to do: effective and professional risk mitigation of global derivatives exposures. The G20 swaps clearing mandate is working remarkably well. 

Now is not the time to direct recalibration of CCP financial resources in resolution. Doing so raises unwarranted questions about the CCPs’ ability to continue weathering the current economic storm and concerns of moral hazard. Moreover, there is no ostensible need to do so when recovery and resolution planning and legal authority are well developed, at least for the world’s most critical CCPs under the CFTC’s able supervision.

Furthermore, the FSB is not the appropriate body to dictate the allocation of loss in CCP resolution. Such decisions have direct commercial and shareholder impact that must be made at the national level by competent regulatory authorities under political oversight, such as the CFTC and FDIC.

I am proud to say that under two very different presidential administrations, the US has retained its commitment to the letter and spirit of the 2009 global swaps reform efforts. The US and its regulatory agencies, including the CFTC, work more effectively and co-operatively than ever before with fellow US and overseas financial regulators, central banks, resolution authorities and recommendatory bodies. The US and its financial agencies deserve respect for their global co-operativeness and extraordinary crisis management. That should not be taken for granted.

The FSB has an important and ongoing role to play in global financial system monitoring and recommendations for matters of true systemic risk. However, the FSB should not and must not overstep that role. It should not presume authority better left to competent national authorities under direct political control and oversight. To do so risks the fine work that has been accomplished in global financial market reform.

J Christopher Giancarlo is senior counsel at Willkie Farr & Gallagher, and a former chairman of the US Commodity Futures Trading Commission. IntercontinentalExchange, owner of six central clearing houses, is a client of Willkie Farr & Gallagher.

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