The Commodity Futures Trading Commission issued a staff letter on July 21 that provides detailed guidance on the issues that clearinghouses should take into account as they develop their recovery plans and wind-down plans. The CFTC noted that the development of these plans is a "critical element" of risk management and contingency planning, and noted that it has been working with its international counterparts on these issues.
“Clearinghouses have taken on an increased importance in the global financial system, and the CFTC is focused on making sure they remain strong and resilient,” CFTC Chairman Tim Massad said. “Today’s staff guidance, which will help clearinghouses improve their recovery plans and wind-down plans, is a critical part of that effort.”
CCP Recovery and Resolution Discussion
The guidance highlighted certain topics that clearinghouses should analyze in developing these plans, which are intended to spell out what steps a clearinghouse would take in case of credit losses, liquidity shortfalls and other risks that could threaten its viability. A recovery plan is designed to keep a clearinghouse operating, while a wind-down plan would guide the process of terminating, selling or transferring its services. The topics covered in the guidance include:
- The range of adverse scenarios that a clearinghouse should consider
- The potential impact of those scenarios on a clearinghouse, its members and other stakeholders
- The types of tools available for use in a recovery situation and the order in which they would be used
- The range of wind-down options that could be used in case recovery fails
- The financial resources needed to cover the costs associated with recovery and wind-down
- The potential impact of "interconnections and interdependencies" among clearinghouses, their affiliates, service providers and other relevant stakeholders.
Regulatory experts at PwC, the accounting and consulting firm, commented that the CFTC’s guidance “significantly raises the bar on the depth and breadth of analysis” required from U.S. clearinghouses and is likely to set a precedent for similar requirements in other countries. PwC also noted that the CFTC’s guidance “goes materially beyond” comparable guidance for banking organizations, and pointed to the fact that clearinghouses will be required to deliver detailed analysis of at least eight business and operational scenarios such as a settlement bank failure or a cyber-attack, as well as risk scenarios resulting from the default of one or more of their clearing members.
One potential result is that clearinghouses will need to increase their financial resources, leading to higher costs for clearing members, PwC said. On the other hand, the guidance requires clearinghouses to involve their clearing members in the development, review and updating of their plans, which PwC said will provide the industry with “greater transparency into CCP operations and resilience.”
