Shearman & Sterling LLP | Financial Regulatory Developments Focus | Financial Stability Board Reports on Risks Posed by Central Counterparties and the CCP Workplan
Financial Regulatory Developments Focus
  • Financial Stability Board Reports on Risks Posed by Central Counterparties and the CCP Workplan
    The Financial Stability Board published a progress report on its CCP workplan. The progress report provides an update on implementation of a workplan agreed on by the FSB, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructure and the International Organization of Securities Commissions (the Group) in April 2015. The workplan focuses on the resilience, recovery planning and resolvability of CCPs and coordinating the roles of each organization in achieving a new international framework for CCPs.

    The CPMI and IOSCO reported that significant work has been undertaken to address the resilience and recovery issues of CCPs. CPMI and IOSCO have published two reports highlighting the shortfalls and gaps in the financial risk management and recovery practices of certain CCPs, and expect to conduct a follow-up targeted review in 2017 of the progress of those CCPs. The FSB reported that it had undertaken a comprehensive analysis of the suitability of the resolution powers and tools in different distress scenarios and identified elements of such strategies for certain CCPs, and has also published a discussion note (for comment by October 17, 2016) on effective resolution strategies and plans for CCPs. The FSB expects to publish more specific guidance in early 2017. The progress report notes the degree of interconnectedness in central clearing, and the resulting systemic implications of this. The Group has collected data for around 20 CCPs to identify and quantify interdependencies between CCPs and their direct members, indirect members, investment counterparties, liquidity providers and other financial institutions, and will report the findings in early 2017. The progress report also touches on the impact of various regulatory initiatives on the incentives to centrally clear. In particular, there is concern that the Basel III leverage ratio framework’s treatment of the potential future exposure of a transaction is defective, as it does not take into account the collateral posted as initial margin by the client. The Basel Committee has consulted on revisions to the ratio and a new methodology for measuring a derivatives potential future exposure. The Basel Committee reported that it expects to finalize its revisions to the design and calibration of the Basel III leverage ratio framework by the end of 2016.  

    View the progress report.

    Further information is available here.