FIA and ISDA published a primer on the issue of non-default losses at clearinghouses. The paper covers who should pay for what types of these losses. The paper also discusses resolution tools for non-default losses and demonstrates the balance sheet impact on a simplified CCP for each of the tools used.
The paper recommends that the guiding principle for allocating non-default losses should be who manages the risk. In line with this principle, FIA and ISDA propose that the CCP and its shareholders should bear almost all non-default losses resulting from operational risks, general business risks, legal risks, cyber risks and fraud (or other internal ‘bad acts’), and the entire amount of non-default losses related to risks that are exclusively within their control. Such an allocation will incentivize prudent risk management.
