The financial crisis clearly illustrated that the failure of an important financial institution can cause critical problems for the rest of the financial system and can negatively impact growth across the wider economy. Since the introduction of new obligations for derivatives markets under the European Market Infrastructure Regulation ("EMIR") in 2012, alongside equivalent regulations in the US and Asia, central counterparties ("CCPs") have continued to grow in systemic importance and play an essential role in the global financial system, accentuating the G20's commitment to ensure there is more transparency and stability for the financial system.
Regulation 2021/23 sets out a framework for the recovery and resolution of central counterparties, with a clear goal of complementing EMIR, to ensure that CCPs in the EU can continue to perform critical operations and services as expected in a financial crisis. This regulation covers specific situations of distress for CCPs, setting out provisions comparable to those in the recovery and resolution rules for banks, by laying down rules and procedures for CCPs authorised in accordance with EMIR and also rules relating to arrangements with third countries in the field of recovery and resolution of CCPs.
Regulation 2021/23 entered into force on February 11, 2021, with the majority of its provisions applying from August 12, 2022.
CCPs shall draw up and maintain a recovery plan providing for measures to be taken in the case of both default and non-default events ,as well as combinations of both, in order to restore their financial soundness, without any extraordinary public financial support, and allow them to continue to provide critical functions even following a significant deterioration of their financial situation or a risk of breaching their capital and prudential requirements under EMIR.
With early intervention a critical supervision component, national authorities have powers to step in when a CCP faces financial difficulties, and can instruct a CCP to take actions in its recovery plan or other steps.
The figure below outlines the key components of a recovery plan for CCPs:
The resolution authority of a CCP shall, after consultation with the competent authority and in coordination with the resolution college, draw up a resolution plan for each individual CCP.
A failing CCP can be put into resolution by national authorities when it is in the public interest, which will see national authorities applying resolution tools as necessary in order to protect financial stability and the taxpayer.
CCPs shall cooperate as necessary in the drawing up of resolution plans and provide their resolution authority, either directly or through their competent authority, with all the information necessary to draw up and implement those plans.
The figure below outlines the key components that resolution authorities may request CCPs to provide for the purposes of drawing up and maintaining resolution plans:
How we can help
Grant Thornton’s Financial Services Risk, Consulting and Advisory team assists a diverse range of financial institutions in the interpretation and the completion of their recovery planning requirements. Our industry-leading Prudential Risk team has extensive knowledge of the legislation and guidance underpinning recovery planning and also has a proven track record of assisting institutions with reviewing and drafting their recovery plans.
We understand that regulation continues to drive the strategic agenda for financial institutions. They specialise in assisting clients across the financial services sector in navigating through the maze of regulation and support clients to identify regulatory obligations and work towards full compliance balanced with your business needs.