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The European Securities and Markets Authority (ESMA) has published six final reports of its review of the CCP Recovery and Resolution Regulation (CCPRRR) and these reports have now been submitted to the European Commission.
The final reports set out proposals for Regulatory Technical Standards (RTSs) on the content of central counterparies (CCPs) resolution plans, resolution colleges, valuation of CCPs’ assets and liabilities in resolution, and safeguards for clients and indirect clients.
It also contains guidelines on the circumstances under which a CCP is deemed to be failing or is likely to fail, as well as on the methodology to value each contract prior to termination.
Aiming to guide resolution authorities in developing effective resolution plans, the overarching goal of ESMA’s reports is to contribute to market preparedness generally and in the “unlikely event” of a CCP entering into resolution.
To determine whether a CCP has failed or is likely to fail, the relevant authorities should assess the available objective elements as they relate to the availability and adequacy of the CCP’s recovery tools, the pre-funded and committed financial resources still available to the CCP, and the liquid resources and liquidity arrangements still available to the CCP.
The authorities will also need to consider the operational capacity of the CCP and other requirements for continuing authorisation.
They should also be prepared for situations where a CCP is unable to manage the default of one or more clearing members, and where a CCP is unable to address a non-default event that results in unmanageable losses for the CCP. ESMA notes that these are both typical circumstances that may result in a CCP’s failure.
According to ESMA, the determination that a CCP is failing or likely to fail should remain an expert judgement and should not be automatically derived from any of the objective elements alone.
The European Commission has three months to decide whether to endorse the proposed standards under a Delegated Regulation.
