CFTC Provides Guidance on Clearinghouse Plans for Recovery and Wind-down

The CFTC Division of Clearing and Risk (“DCR”) issued guidance that included a list of questions for clearinghouses to consider when developing recovery and wind-down plans.

In a supporting statement, CFTC Chair Timothy Massad emphasized that systemically important derivatives clearing organizations are required to maintain viable recovery and wind-down plans that must be designed “to allow a clearinghouse to continue operations when faced with significant credit losses, liquidity shortfalls or other threats to its viability.” According to Chair Massad, a wind-down plan “would guide the process of terminating, selling, or transferring a clearinghouse’s services.” The DCR guidance contains a series of questions that clearinghouses should consider when (i) evaluating whether particular tools for recovery and orderly wind-down should be included; and (ii) designing proposed rule changes to support the inclusion of particular tools in such plans.

Mr. Massad stated that recovery and wind-down planning provides “critical input” concerning the process of resolution planning, which he asserted would occur only “if the failure of an institution could not proceed under applicable state or federal law without causing serious adverse effects on financial stability in the United States, and in that event only if triggered in accordance with the law.” He noted that the CFTC is “co-chairing an effort by international regulators to examine clearinghouse resilience and recovery planning.” He stated that the CFTC is “participating actively in efforts led by the Financial Stability Board on resolution planning and on examining the interdependencies among clearinghouses and their members.” Mr. Massad emphasized that the ultimate goal should be prevention rather than damage control:

Finally, while it is essential that we engage in recovery and resolution planning, our goal is never to get to a situation where either of those is necessary. And that is why daily risk management and monitoring is so important. Those activities, which are carried out by the clearinghouses, the clearing members and ourselves as market regulators, are essential. No recovery plan – and no set of rules that kick in when there is a problem – can take the place of these everyday activities.

In a concurring statement, CFTC Commissioner Sharon Y. Bowen asserted that the “increased use of clearing is a success story.” She cautioned that regulators must “continue to be diligent about ensuring that these CCPs are risk managing appropriately.”

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