The Draft RRP Directive: A CCP’s Perspective

Introduction

On 25 July 2012, the European Association of Central Counterparty Clearing Houses (“EACH”) published a response document to the EU proposal for a directive on bank recovery and resolution (the “RRP Directive”).  The response document provides an interesting insight into the aspects of RRP which are of significance to a CCP.

EACH fully supports the RRP Directive, but feels that the proposal undermines the objectives of EMIR by weakening the risk protections of CCPs in the areas detailed below.

“Sale of Business Tool” and “Bridge Institution Tool”

These resolution tools state that the purchaser (in the case of the Sale of Business Tool – see Article 32.10) or the bridge institution (in the case of the Bridge Institution Tool – see Article 34.8) is to be “considered to be a continuation of the institution under resolution, and may continue to exercise any…right that was exercised by the institution under resolution in respect of the assets, rights or liabilities transferred, including the rights of membership and access to payment, clearing and settlement systems.”

EACH has concerns with respect to the situation where the institution under resolution is a clearing member of a CCP.   In these circumstances, EACH claims that it is vital for the safe operation of a CCP that the purchaser/bridge institution remains capable of fulfilling all of the membership requirements of the CCP as well as all resultant obligations.  Moreover, EACH maintains that the relevant CCP itself must retain the right to determine whether a purchaser/bridge institution meets these criteria so as to avoid unnecessary risk to the stability of the CCP.

“Bail-in Tool”

Article 38(4) of the proposed RRP Directive empowers the EU Commission to consider, under certain circumstances, whether exclusions to the scope and use of the Bail-in Tool are necessary in order to ensure that the resolution objectives specified in Article 26(2) of the proposed RRP Directive are protected.  One of the circumstances specifically contemplated in Article 38(4)(b)(ii) is the possible effect that the application of the debt write-down tool to derivatives that are cleared via a CCP would have on the operation of the CCP itself.

In these circumstances, EACH considers it vital that the CCP retains the right to call the institution under resolution into default.  This would allow the CCP to trigger its default procedures, potentially close-out or transfer positions, and enforce against collateral held by the CCP.  If this is not the case, EACH believes that the CCP’s survival could be threatened.

“Resolution Powers”

Article 62 of the Draft RRP Directive provides for the temporary power of resolution authorities to restrict the ability of creditors of an institution under resolution from enforcing against security interests.  However, CCPs are specifically excluded from this restriction.

Article 63 of the draft RRP Directive enable resolution authorities to temporarily suspend certain rights of a counterparty to an institution under resolution to terminate financial contracts.  Although all reasonable efforts must be made to ensure that margin and collateral calls are met, again, there is no express exclusion to recognise the unique position of CCPs.

Article 61 of the RRP Directive provides for the power to temporary suspend payment and delivery obligations of an institution under resolution, with no exemption being applied to recognise the unique situation of CCPs at all.

This, claims EACH, runs counter to the recommendations of the FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions” published in October 2011, specifically paragraph 3.2(xi) which recognises that “Resolution authorities should have at their disposal a broad range of resolution powers, which should include powers to…Impose a moratorium with a suspension of payments to unsecured creditors and customers (except for payments and property transfers to central counterparties (CCPs) and those entered into the payment, clearing and settlements systems) and a stay on creditor actions to attach assets or otherwise collect money or property from the firm, while protecting the enforcement of eligible netting and collateral agreements”.

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