CCP Non-Default Losses

This paper looks at non-default losses (NDL) at CCPs and covers who should pay for what types of these losses. The paper also analyses resolution tools for non-default losses and demonstrates each of these tools on the balance sheet of a simplified CCP.

The guiding principle for allocating NDL should be who manages the risk. In line with this principle we propose for the allocation of NDL:

  •  In order to properly incentivise CCPs to exercise prudent risk management, CCPs and their shareholders should bear almost all NDL, in particular the entire non-default losses related to risks that are exclusively within their control. That is, CCPs should bear all NDL related to:
    • operational risks.
    general business risks.
    legal risks.
    cyber risks.
    fraud (or other internal ‘bad acts’).
  • In some instances, clearing members and their clients may bear at least a portion of NDL related to custodial risks, settlement bank risks and investment risks. These instances are described in more detail below.

For NDL that a CCP bears itself, the CCP’s parent company and/or equity holders should bear the remaining losses in the event that a CCP’s capital or other dedicated funding is insufficient.

None of the resolution tools we analysed (cash calls, bridge CCP, write-down-and-conversion tool, variation margin gains haircutting) will provide outcomes in line with the no-creditor-worse safeguard, other than the write-down-and-conversion tool, which is very complex and might not always work if initial margin is safeguarded. None of these tools are necessary if CCP equity is sized correctly.

Response on Commodity Derivatives Markets

On April 22, ISDA and FIA submitted a joint response to the European Commission’s (EC) consultation on the functioning of commodity derivatives markets and certain aspects relating to spot energy markets. In addition to questions on position management, reporting and...

Episode 50: The Value of Derivatives

A new report from ISDA shows that companies all over the world use derivatives to alleviate uncertainty, transfer risk and enhance profitability. ISDA discusses the findings with Boston Consulting Group’s Roy Choudhury. Please view this page via Chrome to access...

ISDA/IIF Response to EC Market Risk Consultation

On February 22, ISDA and the Institute of International Finance (IIF) submitted a joint response to the European Commission’s (EC) consultation on the application of the market risk prudential framework. The associations believe the capital framework should be risk-appropriate and...

ISDA Submits Letter on Environmental Credits

On April 15, ISDA submitted a response to the Financial Accounting Standards Board’s (FASB) consultation on environmental credits and environmental credit obligations. The response supports the FASB’s overall proposals to establish clear and consistent accounting guidance for environmental credits, but...