On November 20, ISDA, FIA and the Institute of International Finance submitted a joint response to the Financial Stability Board (FSB) on its consultation on financial resources and tools for central counterparty (CCP) resolution. In the response, the associations express concern that the proposed approach leaves too much flexibility to resolution authorities, and call for more transparency and predictability on what may happen in a resolution scenario, including the tools resolution authorities may use and the circumstances and order in which resolution authorities would be likely to deploy those tools.
The associations also highlight the importance of ensuring that a CCP’s own equity is calibrated in a way that fosters correct incentives for CCP risk management and suggest this should be considered across the recovery and resolution continuum, rather than looking at resolution resources in isolation. The response stresses that authorities should not overly rely on tools such as cash calls and variation margin gains haircutting, which could severely damage market confidence and would come with serious risks to financial stability. The response also includes a detailed discussion on the FSB’s analysis of the resolution tools considered in the consultation.