MFA and AIMA submitted a joint letter to the Committee of Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO) in response to their consultative report on “Recovery of financial market infrastructures”. In the letter, MFA and AIMA noted that the most effective regulatory framework to address the prospect of central counterparty (CCP) failure is one that focuses on preventing CCP failure ex ante. However, in the event a CCP is failing and must use its recovery plans and tools, MFA and AIMA emphasized the importance of employing such tools in a fair and predictable manner that does not place losses disproportionately on customers. In particular, MFA and AIMA:
1. Supported use of ex ante measures to address the relatively remote risk of CCP failure;
2. Recommended orderly liquidation, in situations where a CCP is failing or likely to fail, followed by providing customers with immediate access to their collateral held by the CCP;
3. Expressed that, where prompt and orderly liquidation is not possible due to the size and complexity of a CCP and the CCP must use customer margin haircutting as a loss allocation tool, the CCP should limit such use to variation margin (VM) haircutting on a gross basis only;
4. Recommended that CCP recovery plans and tools 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;
5. Supported maximizing transparency into CCPs’ financial condition at all stages of CCP recovery planning and failure to ensuring predictability for market participants, and therefore, maximize the orderliness of the CCP’s failure; and
6. Expressed that, because there is the potential for customers to bear losses related to, or be required to contribute to, the recovery of a CCP, customers should have affirmative and meaningful representation on CCP governing bodies – in particular, CCP Boards, Risk Committees and Default Management Committees.