ISDA Pushes for Consistent CCP Recovery Framework

The International Swaps and Derivatives Association (ISDA) has published a paper which proposes recovery and continuity frameworks for central counterparties (CCPs).

The trade association has long been lobbying for a consistent framework across clearing houses since the G20 agreement placed them at the center of global derivatives reforms.

ISDA said its proposal is in line with recommendations made by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions in October 2014.

The paper includes a portfolio auction of the defaulted clearing member’s portfolio, limited cash calls to solvent clearing members, loss-allocation mechanisms in the form of a pro-rata reduction of unpaid obligations of the CCP, and consideration of a partial tear-up of contracts to re-establish a matched book.

“Many clearing houses are systemically important and it’s vital they have robust mechanisms in place in order to recover from a threat to their viability,” said Scott O’Malia, ISDA’s Chief Executive Officer.

“ISDA and its members believe that the recovery of a clearing service is preferable to its closure, and we think the proposed recovery framework outlined in this paper offers a comprehensive and effective set of detailed measures to ensure a CCP’s ongoing viability.”

ISDA’s paper follows the publication of its principles for CCP recovery, released in November 2014, which called for greater CCP transparency, use of standardized stress tests and significant CCP ‘skin in the game’.

CME Clearing recently released a white paper on ‘skin in the game’ claiming that its clearing members should contribute more to default funds.

The CCP said it already places $375 million of its own money into the fund.