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ISDA CEO Articulates Principles for Regulating CCP Resolution

ISDA CEO Scott O'Malia urged resolution authorities to "maximize" certainty, predictability, and transparency when dealing with central counterparty ("CCP") recovery efforts. In an article titled "Resolution on CCP Resolution," Mr. O'Malia recommended that authorities:

  • adopt the ISDA-proposed recovery framework, which includes a variety of loss-allocation and position-allocation tools, as well as the sequence of their use, in order to "provide comfort to market participants and minimize market disruption, as well as ensure [that] the concept of 'no credit worse off' – a central element of the ISDA recovery framework – is applied";

  • define indicators for a resolution authority intervention while ensuring that the indicators don't trigger intervention automatically;

  • compensate clearing participants for any losses incurred through the use of loss-allocation or position-allocation tools over and above CCPs' funded and unfunded default resources, whether through recovery or resolution; and

  • utilize "transparency, stress testing, appropriate skin in the game, monitoring of concentration risk and scrutiny of suitability of products for clearing" in order to ensure the strength of CCPs.

As to the broad question of central counterparty ("CCP") resolution, Mr. O'Malia urged consideration of the question as to "when and how recovery becomes resolution." He asked: ". . . at what point should resolution authorities step in, and what tools will be available to them?"

Mr. O'Malia noted that the Financial Stability Board and European regulatory authorities intend to publish, in the near future, further proposals on CCP soundness.


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