FIA, IIF and ISDA (the Associations) applaud CPMI/IOSCO for the discussion paper “A discussion paper on central counterparty practices to address non-default losses”, (the Discussion Paper). The Discussion Paper is a helpful stock-take of CCP practices, including identification where practices seem inconsistent with the PFMIs. We also welcome that notable practices are highlighted.

We believe that an important tool for promoting good NDL risk management is the sharing of best practices between CCPs, which could be facilitated by regulators or global standard setters. Clearing participants stand ready to support CCPs and authorities.

CCPs should be responsible for NDL, with a potential exception for custodian losses, and in particular situations, investment losses. In all other cases, losses should not be allocated to clearing members. Please refer to our 2020 whitepaper on NDL. Any exceptions to this should be clearly defined in CCPs’ rulebooks.

The first line of defense for NDL needs to consist of strong mitigants (policies, procedures, due diligences, and systems) to ensure the likelihood of these losses is minimized. The second line of defense consists of well thought through resources and tools to cover the NDL without recourse to clearing participants.

CCPs should be well capitalized to minimize the risk of resolution. There should be a link between NDL and CCP capital requirements. The recent FSB consultation “Central Counterparty Financial Resources for Recovery and Resolution” (the FSB Paper, the FIA/IIF/ISDA response can be found here) included scenarios where some CCPs did not have sufficient capital and needed to be resolved.

We also believe that clearing participants (clearing members and clients alike) should be consulted in planning, transparency, and governance. Clearing Members also should have greater visibility into CCPs’ IT controls and cyber risk best practices.

While we understand that best-in-class CCPs have good NDL risk management frameworks, the Discussion Paper makes clear that this is not the case for all CCPs. CPMI/IOSCO had undertaken a level-3 implementation monitoring in May 2018 where they had identified gaps in implementation of recovery tools to address NDLs[1]. Some of those gaps continue to exist today. Taken together with the findings in the FSB Paper, we believe this demonstrates the need for additional standards around how NDL risk should be evaluated and the type of resources that should be held against this risk.

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

[1] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD601.pdf