ISDA, the Futures Industry Association and the Institute of International Finance represent the largest number of participants in national and global clearing, banking and financial markets. The Associations appreciate the opportunity to comment on the consultation paper Central Counterparty Financial Resources for Recovery and Resolution.

This response covers the positions of our members on the buy side and sell side. The paper does not reflect the views of many central counterparties (CCPs) and many of the CCPs are in disagreement with the views.

We would also like to refer to our response to the Financial Stability Board’s (FSB) 2020 consultation Guidance on Financial Resources to Support CCP Resolution and on the Treatment of CCP Equity in Resolution and our response to FSB’s discussion paper Financial resources to support CCP resolution and the treatment of CCP equity in resolution, which was published in November 2018. The comments submitted by the Associations in response to the 2020 consultation and the 2018 discussion paper are still valid and form the basis for this response. We also refer to our analysis of recovery and resolution tools in our paper Recovery and resolution: Incentives Analysis, which covers many of the same tools assessed as part of the FSB’s qualitative analysis of recovery tools in this consultation paper, even though we come to different conclusions for certain tools.

We welcome the FSB’s ongoing focus on the important topic of adequacy and impact of CCP financial resources for recovery and resolution. CCPs are a cornerstone of the financial system and their resilience, recoverability and resolvability are paramount to preserve financial stability. We welcome the initial analysis presented in the report, and support the FSB’s proposed next steps, including widening the analysis to cover a broader set of entities and reviewing the cost and benefits of alternative financial resources and tools for CCP resolution. In this response we offer our views on the FSB’s analysis and make suggestions to enhance future analyses and related work on this important topic.

• While we welcome the consultation paper’s finding that CCPs that were part of the analysis were resilient overall, the reliance on recovery tools – such as cash calls at eight CCPs, extending into variation margin gains haircutting at two of them under the default loss scenario – suggests a need to review sufficiency of defaulters’ resources and the adequacy of CCP capital to ensure risk management incentives are appropriately aligned.
• CCPs were also resilient under the liquidity non-default loss scenario. However, we are concerned about the finding that the majority of CCPs required resolution in the cyber theft scenario.
• As part of the qualitative analysis of recovery and resolution tools we would have welcomed the assessment of tools against a “fairness” criterion and also the consideration of CCP equity, pre-positioned resolution resources, compensation to market participants, and a discussion of recapitalization.
• Overall, the consultation paper focusses disproportionately on loss allocation tools to clearing participants and does not emphasize sufficiently the role of CCPs’ own financial resources. We believe that a better balance between loss allocation to clearing participants and loss allocation to CCPs would promote better outcomes from a resilience and financial stability perspective.