VIDEO | As CCP recovery and resolution frameworks continue to evolve, emphasis on rigorous crisis testing, collaborative regulation, and transparent risk distribution has strengthened. At the PostTrade 360° Nordic 2024 panel, industry experts discussed these developments, shedding light on both progress and challenges in managing systemic risk and ensuring the resilience of CCPs amid a shifting financial landscape.
Central to CCP resilience is the default waterfall, a structured approach that prioritises the allocation of losses in a crisis. Alex Krunic of the Commercial Bank of Kuwait explained that, following a default, “the risk becomes mutualised,” with initial losses covered by the defaulting member’s resources. Beyond this, remaining losses are distributed among the CCP’s members, drawing from the CCP’s “skin in the game” to reduce impact on non-defaulting participants. “Once the defaulting member’s resources are completely utilised,” Krunic added, “the first level of that risk being mutualised is obviously skin in the game from the CCP.”
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Haroun Boucheta of BNP Paribas voiced concern over CCP practices that occasionally shift greater liability to non-defaulting members. “Sometimes, we saw that the second tranche of the skin in the game was set up, removing the amount of the first tranche of skin in the game,” he noted, underscoring that this practice runs counter to the spirit of recovery and resolution regulation and adds potential risk for members.
Addressing common shock risks
Panelists also discussed the challenges of preparing for “common shock” events, where multiple institutions face simultaneous crises. Richard Metcalfe of the World Federation of Exchanges observed a discrepancy in global perspectives, with some reports downplaying the risk while others view it as significant. “These conflicting views in the policy world might be worth exploring further,” Metcalfe remarked, suggesting that a deeper policy-level discussion could address how CCPs might handle correlated financial shocks that transcend geographic and operational boundaries.
Simulations
To ensure readiness, CCPs are increasingly adopting rigorous crisis simulations that involve internal and external stakeholders. Owen Thorpe of Cboe Clear Europe shared insights from recent testing, noting that “one of our key learnings was about the communication needed internally and externally.” Frequent fire drills and crisis simulations are enabling CCPs to refine response protocols, making them more adept at handling high-pressure scenarios while maintaining coordinated efforts with regulators and members.
The shift toward cooperative oversight in resolution planning was a key discussion point. Randy Priem of the Belgian Financial Services and Markets Authority noted that resolution colleges have expanded beyond traditional oversight groups. “We are, I would say, more in a negative atmosphere,” Priem explained, as regulators work with CCPs to prepare for worst-case scenarios.
Stress testing
The latest ESMA stress tests indicate that EU Tier 2 CCPs are becoming more resilient, largely due to a 56 per cent rise in margin calls over recent years. “EU tier 2 CCPs are more resilient than before to credit concentration and liquidity risks,” Boucheta reported, emphasising that raised margins have bolstered CCPs’ defence against potential financial crises. Priem highlighted that as transparency becomes essential, clearing members should have a clear understanding of margin requirements. “Clearing members need to understand margins,” He stated, underscoring the importance of accessible data for anticipating financial obligations.
Panelists:
Haroun Boucheta, head of Public Affairs, Securities Services, BNP Paribas
Owen Thorpe, chief risk officer, Cboe Clear Europe
Randy Priem, coordinator of the markets and post-trading unit + Finance professor, Belgium’s Financial Services and Markets Authority
Alex Krunic, advisor to the Chairman, Commercial Bank of Kuwait (CBK)
Richard Metcalfe, head, Regulatory Affairs, World Federation of Exchanges
Moderator: Joshua Hurley, director – Post Trade Consulting, Davies
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