Investment Operations

GLOBAL REGULATORS ADDRESS CCP PRACTICES FOR ADDRESSING NON-DEFAULT LOSSES

Financial Compliance
  • CPMI and IOSCO seek input on discussion paper focusing on central counterparty (CCP) practices to address non-default losses (NDLs), such as losses from cyber attacks.
  • As non-default events can threaten a CCP’s viability, CCPs need to have policies, procedures and plans to address NDLs if they materialize.
  • The report seeks to advance industry efforts and foster dialogue on CCPs’ management of potential losses arising from NDLs.

The Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have published for public comment a discussion paper on central counterparty (CCP) practices to address non-default losses (NDL).

According to the regulators, CCPs have become increasingly important in the financial system for managing counterparty risk, especially since the introduction of the clearing obligation for standardized OTC derivatives following the 2007–09 global financial crisis. Therefore, “the resilience of CCPs in case of losses and liquidity shortfalls – whether they arise from the default of CCP clearing members or from non-default events (eg losses from cyber attacks) – has become critical for financial stability,” said the paper.

Analysts say non-default events can threaten a CCP’s viability as a going concern and its ability to continue providing critical services. Therefore, according to the Principles for financial market infrastructures (PFMI), CCPs must take action and have policies, procedures and plans for addressing NDLs, in addition to a sound risk management framework to mitigate and manage those risks.

The regulators said the discussion paper seeks to advance industry efforts and foster dialogue on the key concepts and processes used by CCPs. It outlines current practices at various CCPs to address NDLs in business as usual (BAU), recovery and orderly wind-down scenarios, but cautioned the the paper is not intended to create additional standards for CCPs beyond those set out in the PFMI. Nor is it intended to be an assessment of whether CCPs have appropriately implemented the standards set out in the PFMI regarding NDLs.

Published with this report is a cover note listing some of the specific issues on which the CPMI and IOSCO are soliciting input from industry and the broader public. As with other discussion papers, the purpose of this paper is to elicit comments and feedback from a broad range of interested stakeholders, and the CPMI and IOSCO are inviting input on the report by 4 October 2022.