European policymakers are working on legislation that will establish a framework for central counterparty recovery and resolution in the European Union. The draft legislation, which was proposed in November 2016, is now under active review in the European Parliament and the European Council.
On Sept. 20, the European Central Bank issued an opinion on the proposed regulation in response to requests from both the Parliament and the Council. The ECB strongly endorse the legislation but recommended several amendments related to the process for resolving failed clearinghouses. These included providing resolution authorities with "sufficient flexibility" to balance the uncertain nature of the market events that might trigger a CCP failure with the needs of clearing participants to estimate and manage their potential exposures. The ECB also recommended strengthening safeguards against public sector support; ensuring "horizontal cooperation" in order to manage interactions across multiple CCPs in the euro zone; and aligning EU recovery and resolution plans with international standards.
In Parliament, the review process is being led by two members of the Committee on Economic and Monetary Affairs: Kay Swinburne, a U.K. conservative, and Jakob von Weizsäcker, a German progressive. On Sept. 25, the two rapporteurs released a draft report on the legislation with their recommended amendments to the text. These amendments included a new provision stressing the importance of "proper incentives" for CCPs, clearing members and clients to support recovery plans. The amendments also call for "substantial loss absorption" by clearing members before any losses are allocated to clients. The next step is for the committee to discuss the amendments and approve a final version of the report, which will then become the basis for negotiations with the Council and the Commission.