On September 7, ISDA and FIA responded to a Bank of England (BOE) discussion paper on central counterparty (CCP) resolution. The associations support greater clarity on valuation capabilities prior to a crisis scenario and the boundary between recovery and resolution, while stressing that default fund contributions are designed to mutualize default risk and should not become a mechanism for absorbing operational or other non-default losses. The associations caution against any change to the creditor hierarchy that would result in weakening the no-creditor-worse-off safeguard.

Where clearing members or other creditors are required to bear losses or provide resources in resolution, the associations underline the importance of credible mechanisms to return value to clearing members that have contributed funds towards successful resolution. Compensation could take the form of profit-sharing arrangements where appropriate.

On partial tear-up, ISDA and FIA support commercially reasonable pricing and recognize that a pro-rata approach may often be equitable, but emphasize the importance of assessing the hedging, liquidity and contagion effects on non-defaulting members and clients.

The associations also support the BOE’s proposed resolvability outcomes but encourage greater transparency on resolvability assessments and resolution planning so clearing participants can act on reliable information rather than worst-case scenario assumptions during stress. The associations recommend that resolvability assessments explicitly address how the BOE would coordinate with third-country authorities in a UK CCP resolution – particularly when the use of recovery or resolution tools could transmit losses or disruption to financial systems outside the UK, given this is a key concern of EU authorities when considering the EU financial system’s reliance on clearing at UK CCPs.