WFE issues industry guidance on non-default losses for CCPs
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WFE issues industry guidance on non-default losses for CCPs 11 June 2020London Reporter: Maddie Saghir
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The World Federation of Exchanges (WFE), the global industry group for exchanges and central clearing counterparties (CCPs), has set out how CCPs should ensure that certain non-credit losses that might rarely occur in relation to clearing are allocated in a transparent, predictable and equitable manner.
addresses the treatment of such 鈥榥on-default losses鈥� (NDLs) as part of its 2019-2020 programme of work on incentives in clearing, and in the context of CCPs鈥� missions to manage the timely and effective reduction of counterparty credit risk within the financial system.
The WFE notes in its guidance that NDLs remain rare.
NDLs come in various types, each of which requires distinct analysis, and no top-10 CCP has in practice ever allocated NDLs to users, says WFE.
Additionally, the WFE highlights that CCPs reserve the right to manage liability in line with industry practice, notably in relation to custodial disruption.
In the case of custody, the third party is itself regulated and the assets may also be 鈥榖ankruptcy remote鈥� from the service provider鈥檚 own balance sheet, it notes.
It also explains that CCPs work collaboratively with users and supervisors to make derivatives contracts and securities transactions credible and systemically manageable, by minimising the impact of disruption from user default.
The WFE says: 鈥淐learinghouses are an integral part of exchange-traded financial markets and also support a large proportion of over the counter derivatives.鈥�
According to the WFE, CCPs have supported markets through recent COVID-19 pandemic volatility.
The WFE observed that clearing houses have continued to perform the crucial role recognised by policy-makers after the global crisis of 2008. In doing so, they require market participants to back the risks they take (by posting margin and other resources).
Nandini Sukumar, CEO of the WFE, says: 鈥淣on-default losses may not be the main risk faced by CCPs, but it is still important to have a structured approach to dealing with them. That way, CCPs can devote more time to their day job, ensuring that uncertainty over counterparty credit exposures does not threaten the integrity of the financial system.
"This is why the WFE has taken the initiative to highlight the responsible, constructive practices employed by clearing houses in relation to potential incidents and their financial consequences if any.鈥�
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