MFA and AIMA submitted a joint letter to the Financial Stability Board (IOSCO) in response to its consultative document on “Application of the Key Attributes of Effective Resolution Regimes to Non-Bank Financial Institutions”. In the letter, MFA and AIMA noted that the most effective regulatory framework to ensure that a central counterparty (CCP) is never subject to a resolution regime is one that focuses on preventing CCP failure ex ante. However, in the event a CCP fails and resolution authorities must implement the applicable resolution regime, MFA and AIMA emphasized the importance of employing any loss allocation tools in such resolution in a fair and predictable manner that does not place losses disproportionately on customers. In particular, MFA and AIMA:
- Supported use of ex ante measures to address the relatively remote risk of CCP failure;
- Recommended that, in situations where a CCP has failed and has entered into resolution, where possible, the CCP be liquidated in as prompt and efficient a manner as possible, with clients gaining immediate access to their collateral held by the CCP;
- Expressed that, where prompt and orderly liquidation is not possible due to the size and complexity of a CCP and the resolution authority must use customer margin haircutting as a loss allocation tool, the resolution authority should limit such use to variation margin (VM) haircutting on a gross basis only;
- Recommended that, in resolving a CCP, the resolution authority should take into account the size of a CCP, the breadth of services that it offers, and the consequences to the broader financial system of its failure or cessation in providing clearing services;
- Supported maximizing transparency into the resolution authority’s decision-making at all stages of a CCP resolution to ensure predictability for market participants and maximize the orderliness of the CCP’s failure; and
- Expressed that, because there is the potential for customers to bear losses due to a CCP resolution, such as being subject to margin haircuts as a loss allocation tool, customers should have affirmative and meaningful representation on CCP governing bodies – in particular, CCP Boards, Risk Committees and Default Management Committees.