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.