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A blueprint for the first set of worldwide, bespoke rules around “living wills” for clearing houses and other parts of the vital infrastructure that underpins the financial system has been revealed by global standard-setters.
The Basel-based Financial Stability Board, an umbrella group of central bankers and regulators that makes recommendations to the G20 nations, on Wednesday laid out an eight-step plan to try to prevent taxpayer bail-outs of clearing houses, known as CCPs.
The plans are meant to ensure that a failing CCP gets wound up without causing collateral damage to the rest of the financial system, or that its functions are taken over by a bridging entity coupled with the wind-down of the “bad” CCP.
The eight steps include urging G20 countries to make domestic laws that create a special resolution authority with the power to temporarily operate the CCP and enforce any contractual arrangements, as well as special “bail-in” measures where unsecured liabilities would convert to equity.
The recommendations echo work that is already afoot in the European Union, the UK and other jurisdictions to try to stop CCPs from becoming too big to fail. Banks and insurers already have resolution plans. The FSB responded to industry criticism that CCPs needed their own bespoke rules.
The plans come as the EU is still deliberating over whether to allow on antitrust grounds the £20bn merger between London Stock Exchange Group and Deutsche Boerse.
A clearing house sits between two sides of a trade and insulates the rest of the market if one side defaults.
Policy makers have become increasingly concerned at the growing importance of market infrastructure to the financial system as a whole. Rules put in place since the financial crisis mean that CCPs in particular have enjoyed a greater role since the crisis.
“CCPs are an integral part of the financial system and play an important role in mitigating risks to the financial system. They have grown substantially over the last years. The failure of a CCP would have a significant impact on financial stability,” said Elke Koenig, the German who chairs the team at the FSB that oversees resolution planning. She also chairs the EU’s Single Resolution Board.
She added: “It is essential that authorities have effective resolution planning arrangements in place, including legal powers and tools to take action in a crisis. Once finalised the guidance will provide an internationally agreed standard for CCP resolution.”