In a consultation report published last year on CCP resolution, the Financial Stability Board (FSB) proposed a toolbox for maintaining critical functions should resolution of a CCP become necessary. Commenting on the FSB’s proposal at the recent World Federation of Exchanges (WFE), member of the board of Deutsche Bundesbank Burkhard Balz applauds the flexible design of the toolbox and reminds the audience that “access to tools is not an end in itself. They must be fit for purpose”.
FSB’s report offers jurisdictions “an additional footing to set up instruments to deal with crisis situations severe enough to trigger resolution”. Balz highlights a couple of funding instruments analysed in the report, such as statutory or contractual variation margin gains haircutting for resolution and equity in a first-loss position.
Addressing his comment that tools should be fit for purpose, Balz applauds the flexble design of the toolbox, saying that it allows jurisdictions “discretionary scope to address the individual specifics of the supervised CCPs, the local situation of the financial market and, finally, to select the best and appropriate tools for overcoming a crisis”.
He emphasises that “there is no one-size-fits-all solution”. The effectiveness of the toolbox depends on the user’s ability to choose the most appropriate tool for each situation, and tailoring the response to the challenge at hand.
Prevention better than cure
Nevertheless, “resolution is a state that we need to avoid as far as possible,” says Balz. He advocates for trust and close cooperation between regulators and market participants. A proactive approach, with diverse perspectives, will “optimise our understanding” of the consequences of a CCP default and “contribute to our collective toolbox”.