DG P AYMENTS AND M ARKET I NFRASTRUCTURE
CONFIDENTIAL
20 December 2012
The ECB supports the work of the European Commission towards developing an effective recovery and resolution framework for financial institutions other than banks, including in particular FMIs in view of the increasingly important role that such infrastructures play with regard to preserving financial stability. It is vital that very robust arrangements exist for the recovery of Financial Market Infrastructures (FMIs) and, if that fails, for their resolution. The ECB welcomes the opportunity to provide input into the public consultation that the Commission has launched to this end. Owing to its role and responsibilities for monetary policy and the stability of the financial system at large, the ECB has a particular interest in FMIs including payments systems, central counterparties (CCPs), central securities depositories (CSDs), and trade repositories.
This contribution focuses on the recovery and resolution of such FMIs. It consists of two parts. First, it provides a few general observations on aspects that the Eurosystem considers to be particularly important from a central bank perspective. Second, it provides short answers to the individual questions raised in section 3 of the consultation document focusing on FMIs.
2.1.
Scope of the recovery and resolution regime
The Commission’s consultation mainly focuses on CCPs and CSDs, whereas payment systems are excluded from further consideration “given their special relationship with and oversight by central banks”. Central banks have a special relationship with FMIs from a number of perspectives: as users, service providers, and overseers. This relationship as such, however, cannot guarantee that service continuity will be preserved under all circumstances.
Rather, the ECB considers that all systemically relevant FMIs including payment systems should be subject to a recovery and resolution regime unless they are owned and operated by a central bank. Large-value

2 payment systems and many retail payment systems are systemically relevant. They may provide settlement guarantees, can be exposed to credit risk themselves or entail credit and liquidity risk among their participants, and are essential for the functioning of financial markets and the economy at large. It is vital that service continuity of such systems is preserved. Moreover, the existence of a sound recovery and resolution framework is a precondition for a globally acting payment system to be located in the EU. The
ECB therefore considers that all systematically relevant payments systems should be subject to a recovery and resolution regime. Only those payment systems that are owned and operated by central banks should be exempted as in this case the continuity of services can be guaranteed under all circumstances.
Similarly, while trade repositories are less systemically relevant as they do not take on credit risk and do not pose an immediate threat to the functioning of financial markets should they fail, they are still important infrastructures that support relevant authorities in identifying risks in OTC derivatives markets. Moreover, in view of their fragmentation and given that their business models have not been tested over a sufficient period of time, trade repositories may well be exposed to business risks and losses that could cause them fail. It needs to be ensured that in such an event data can be transferred smoothly to another trade repository. Trade repositories should therefore also be covered by the EU recovery and resolution framework to be developed.
2.2.
Need for effective recovery and resolution regimes specifically designed for FMIs
The ECB believes that effective risk management in line with the CPSS-IOSCO Principles for Financial
Market Infrastructures ( Principles ) is key in preventing any need for recovery and resolution of FMIs.
However, FMIs and relevant authorities nevertheless need to be prepared for the failure of an FMI which can lead to severe systemic disruption if it causes markets to cease to operate effectively.
FMIs are different from other types of financial institutions in a number of ways. First, there is a higher significance of service continuation for financial stability. In providing critical operations and services, an
FMI develops direct relationships with participants, other FMIs, and other service providers, which increase its interconnectedness and the potential for disruptions to spread quickly across the financial system. Second,
FMIs often have few, if any, substitutes or alternative providers. These differences are relevant to the choices facing authorities to achieve resolution including the possibility and necessity to consider creating a bridge institution. Third, this functional difference also affects the size and composition of the balance sheet of an
FMI. For example, FMIs rarely issue subordinated debt instruments commonly seen in financial institutions.
These differences can extend to the equity part of a balance sheet, where FMIs may be owned by their members or public authorities. This may have the effect of requiring some adaptation of bail-in as a resolution tool. Finally and importantly, the Principles require FMIs to have rules and plans in place for the allocation of uncovered losses and liquidity shortfalls. Such requirements constitute an important step towards ensuring the FMI’s recovery and do not exist for banks.

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Against this background and in view of the specific nature of FMIs that makes them different from banks, the ECB believes there is a need for establishing a European recovery and resolution regime which is specifically designed for the purposes of FMIs and distinct from the resolution framework for banks.
2.3.
Need for consistency at international level
Drawing on experience in the field of regulations for OTC derivatives and central clearing, the ECB believes it is highly desirable to achieve international consistency of recovery and resolution regimes for FMIs.
Divergences in national rules create a potential for regulatory arbitrage and may confront infrastructures and their participants with contradicting and/or overlapping rules. To this end, the ECB urges the Commission to align any possible EU regulation in this field with the recovery and resolution framework that is currently being developed at global level by CPSS and IOSCO. At this stage, the international standards setters have developed two sets of provisions to guide the development of recovery and resolution regimes:
(i) The CPSS-IOSCO Principles : While the main focus of the Principles is to prevent the need for recovery and resolution measures on the basis of effective risk management, they go beyond prevention and contain a number of relevant references to the recovery of FMIs, including most importantly rules for the allocation of uncovered losses and liquidity shortfalls as well as capital requirements for FMIs to cover business losses and to ensure an orderly wind-down or reorganisation of its critical operations and services (see Principles, 4,7 and 15).
(ii) The Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial
Institutions ( Key Attributes ): In the event of recovery failing, a statutory resolution regime is needed .
In their consultative report on recovery and resolution regimes for FMIs, the CPSS and IOSCO have adapted the Key Attributes to take into account the specific characteristic of FMIs.
Importantly, the CPSS and IOSCO are currently in a process of elaborating further on an effective recovery regime for FMIs along three main lines: (i) the relations between FMI risk management, recovery, and resolution; (ii) tools for recovery; and (iii) cooperation among authorities. The ECB is confident that the forthcoming EU recovery and resolution regime for FMIs will be aligned with the international standards as being developed by CPSS and IOSCO.
2.4.
Need for a centralised and effective resolution mechanism
The EU is currently in a process of moving towards a banking union including an integrated resolution framework as one of three pillars constituting a banking union. The establishment of a European Resolution
Authority represents a critical next step to this end. While the EU regulatory framework for CCPs under
EMIR is based on the concept of supervisory colleges and the creation of a single European supervisor for
FMIs has not yet been taken forward, there is nevertheless a strong case for a centralised EU resolution mechanism for FMIs for a number of reasons.
First, the resolution of FMIs requires swift decision taking that cannot afford lengthy coordination processes among a multitude of authorities. For example, supervisory authorities may assess a given situation

4 differently. Such differences in the assessment of available information in an event of urgency may complicate the finalization of the resolution process. A common resolution structure, with a unified resolution regime and a single resolution authority would avoid such problems and facilitate swift decision making. Second, many FMIs are so large in size and scope that their failure would, on the one hand, endanger the financial system of several countries at the same time, but on the other hand, be too large for the national government of the home country to be supported in case of stress and thereby causing or exacerbate funding problems of the sovereign, which might further destabilize the financial sector. For these reasons, a centralised resolution authority in particular for CCPs, ICSDs, and large-value payment systems would be very beneficial especially as financial stability and the implementation of monetary policy critically depend on the smooth functioning of payment and settlement systems.
Against this background, the ECB would propose designating a single centralised European Resolution
Authority for FMIs, in particular for CCPs, ICSDs, and large-value payment systems, even before the current framework for the regulation and oversight of FMIs has been moved further ahead towards greater centralisation. The ECB believes that ESMA could act as the single resolution authority for such FMIs, in cooperation with the ECB in view of its roles both as future European banking supervisor and as central bank of issue.
2.5.
Need to distinguish between different types of FMIs
Effective recovery and resolution regimes are important for all types of FMIs. However, FMIs are different in nature, are exposed to different types of risks, and their failure may have different systemic implications.
Careful distinction therefore needs to be made between the different risk profiles that FMIs may have.
For example, in the event of the default of a CCP, the most serious problem that needs to be addressed is the allocation of any uncovered losses and liquidity shortfalls first by means of recovery on the basis of the
CCP’s own rules and subsequently if recovery fails by statutory loss allocation for resolution. Similarly, the recovery of a CCP needs to focus on tools that can be used to re-establish a matched book including tear up in the event regular auctions do not work. In contrast, for the recovery of CSDs, the focus needs to be on managing business risk and maintaining adequate capital resources to this end and to ensure the smooth transfer of services either to third parties or a bridge institution that might need to be created just for that purpose.
Such differences in emphasis and focus do not necessarily call for separate recovery and resolution regimes per type of FMI, but suggest that relevant provisions and requirements might need to be adjusted and complemented to fit the specific risks and systemic implications that a particular type of FMI may be exposed to and/or create.

2.6.
Need to clarify the relationship with regular insolvency law
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The distinction between the resolution regime for FMIs and regular insolvency rules needs to be clearly drawn in that a resolution regime for FMIs may either replace ordinary insolvency law or complement it as an intermediate step needed to prevent insolvency. For example, to the extent that resolution focuses on steps and measures to be taken by authorities after recovery efforts have failed and before regular insolvency proceedings start, e.g. measures to ensure the orderly wind down of CCPs or transfer of services, a statutory resolution regime may complement regular insolvency law by serving as a tool to prevent regular insolvency proceedings from coming into force.
Alternatively, a resolution regime for FMIs may replace existing insolvency rules to the extent that specific loss allocation rules could be required that are different from those that would result from ordinary insolvency law. Similarly, the need to preserve service continuation may require specific rules that may deviate from and thus replace ordinary insolvency law.
1.
Do you think that a framework of measures and powers for authorities to resolve CCPs and CSDs is needed at EU level or do you consider that ordinary insolvency law is sufficient?
In general, loss sharing rules under a resolution regime for FMIs should be designed in a way that the default of an FMI has the least systemic impact and avoids recourse to taxpayer money. It is by no means certain that ordinary insolvency law can achieve this result. The development of a recovery and resolution framework for FMIs offers the unique opportunity to make sure that losses are assigned to a sufficiently large group of entities and in particular to those that are most capable of coping with them, thus likely achieving a better outcome than if regular insolvency rules were applied.
Moreover, continuation of services is more critical for FMIs than it is for other financial institutions.
Ordinary insolvency law may not cater sufficiently for this overarching concern.
2.
In your view, which scenarios/events might lead to the need to resolve respectively a CCP and a
CSD? Which types of scenarios CCPs/CSDs and authorities need to be prepared for which may imply the need for recovery actions if not yet resolution?
There are different triggers for recovery and resolution respectively. If an FMI fails to maintain a generally sound financial condition, it may need to implement its recovery plan (or be forced to do so by the appropriate authority). In particular, if an FMI fails to maintain sufficient capital against its general business risk or if it emerges that the financial resources (including margin and default fund contributions) are not sufficient to cover the losses from one or more participant defaults, the recovery plan should be implemented in order to put the FMI on a sustainable path to financial health.
The triggers for an FMI entering into resolution include (1) the recovery plan has failed or has not otherwise been implemented in a timely manner, (2) resolution of the FMI under regular insolvency law could be disruptive to the financial system, or (3) the relevant authority determines that the circumstances warrant

6 bypassing execution of the recovery plan and placing the FMI into resolution immediately. In general, it is important to note that authorities and market participants will never be able to predict and prepare for all possible scenarios that might trigger resolution. Therefore, resolution regimes should be sufficiently flexible to allow authorities to optimally respond to various scenarios and circumstances.
3.
Do you think that existing rules which may impact CCPs/CSDs resolution (such as provisions on collateral or settlement finality) should be amended to facilitate the implementation of a resolution regime for CCPs/CSDs?
If resolution arrangements should also include the bailing in of some or all of the surviving participants’ initial and variation margin, this could be in contradiction with EMIR. For instance, EMIR stipulates that “a
CCP shall not use the margins posted by non-defaulting clearing members to cover the losses resulting from the default of another clearing member” and a CCP shall not “expose the non-defaulting clearing members to losses that they cannot anticipate or control”.
Furthermore, the ECB would not exclude at this stage that existing rules and regulations might have to be adapted and amended once the recovery and resolution regime for FMIs has been more fully developed in order to ensure that the various rules are consistent with each other.
4.
Do you consider that a common resolution framework applicable to CCPs and CSDs is desirable or do you favour specific regimes by type of FMIs?
As outlined above, different types of FMIs are exposed to different risks and their failure may cause different types of disruption. Key differences are whether or not an FMI takes on credit risk, and to what extent the functioning of financial markets would be disrupted if the FMI ceases operation, which affects the need for transferring services to another provider (if available) or establishing a bridge institution. Such differences in emphasis and focus do not necessarily call for separate recovery and resolution regimes per type of FMI, but suggest that relevant provisions and requirements might need to be adjusted and complemented to fit the specific risks and systemic implications that a particular type of FMI may be exposed to and/or create.
5.
Do you consider that it should only apply to those FMIs which attain specific thresholds in terms of size, level of interconnectedness and/or degree of substitutability, or to those FMIs that incur particular risks, such as credit and liquidity risks, or that it should apply to all? If the former, what are suitable thresholds in one or more of these respects beyond which FMIs are relevant from a resolution point of view? What would be an appropriate treatment of CSDs that do not incur credit and liquidity risks and those that incur such risks?
The ECB believe that all systemically important FMIs should be subject to a recovery and resolution regime.
In line with the Principles , the ECB takes the view that all CSDs, CCPs, and trade repositories are systemically important and should therefore be covered by a European resolution framework, regardless of size, interconnectedness and/or substitutability. In the case of payment systems, the ECB believes that at a

7 minimum all large-value payments systems and all retail payment systems as defined systemically important by the Eurosystem “Oversight standards for euro retail payment systems” should be covered.
6.
Regarding FMIs (some CSDs and some CCPs) that are also credit institutions, is the proposed bank recovery and resolution framework sufficient or should something in addition be considered? If so, what should the FMI-specific framework add to the bank recovery and resolution framework? How do you see the interaction between the resolution regime for banks and a specific regime for
CCPs/CSDs?
The ECB would suggest that a functional approach be adopted rather than an institutional approach. Whether or not an FMI has a banking license does not substantially alter the risks that the FMI is exposed to, nor does it result in substantially different implications from a systemic risk point of view. As a consequence, FMIs should be treated equally and be subject to the same recovery and resolution regime regardless of whether they are credit institutions or not.
7.
Do you agree that the general objective for the resolution of CCPs/CSDs should be continuity of critical services?
The ECB agrees that the main aim of recovery and resolution is to preserve the continuity of an FMI’s systemically important functions, notably in a way that has the least systemic impact and does not require recourse to taxpayer money.
8.
Do you agree with the above objectives for the resolution of CCPs/CSDs?
In consistency with the Key Attributes, the ECB agrees that resolution should ensure
9.
Which ones are, according to you, the ones that should be prioritized?
These high-level objectives are complimentary to one another and go hand in hand. Any prioritisation appears artificial and would not be useful. For example, the continuity of services and avoidance of contagion are both necessary elements and conditions for preserving financial stability. It is also not helpful to construct a resolution regime under the assumption that there could be a trade-off between financial stability and losses for taxpayers. The objective of a resolution regime must be that critical services and financial stability are maintained without losses for taxpayers. A resolution regime for FMIs should not rely on public solvency support and not create any expectation that such support will be available. The recovery and resolution plans should allocate losses or costs to the FMI’s capital, owners (shareholders), participants and creditors.
10.
What other objectives are important for CCP/CSD resolution?

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The resolution of an FMI should not obstruct or disincentives the recovery efforts by the FMI or its overseer.
More generally, close cooperation between the resolution authority and the FMI’s overseer needs to be ensured.
11.
What should be the respective roles of FMIs and authorities in the development and execution of recovery plans and resolution plans? Should resolution authorities have the power to request changes in the operation of FMIs in order to ensure resolvability?
The repartition of roles and responsibilities is different for recovery and resolution respectively. As regards recovery, under the Principles , the FMI is required to draw up recovery plans. Moreover, if, despite preventive measures, an event occurs or escalates so as to threaten the continuation of an FMI’s critical operations and services, the FMI will need to execute its recovery plans designed to address the threat, for example to replenish financial resources, and to maintain observance of the Principles . The development and activation of recovery plans and procedures are therefore essentially the responsibility of the FMI itself, however under the oversight of the relevant authority and in line with the Principles . This means that the authorities have two responsibilities for recovery. First, an FMI’s direct supervisor, regulator and/or overseer is responsible for monitoring and assessing the recovery plans’ adequacy. Moreover, relevant supervisory, regulatory, and oversight authorities should oversee the execution of these plans, coordinating with the authority designated with responsibility for exercising resolution powers (the “resolution authority”) as necessary. Coordination and information-sharing among and between all relevant parties are critical to the successful execution of the FMI’s plans.
As regards resolution, primary responsibility for preparing and implementing resolution plans lies principally with the home resolution authority in cooperation with other relevant authorities. These responsibilities are set out in the Key Attributes and are compatible with cooperative arrangements established by the
Responsibilities , particularly Responsibility E. The FMI should be required to provide the authorities with specifically identified data and information needed for the purposes of timely resolution planning.
Authorities should review the plans with the FMI to the extent necessary, but they may decide not to disclose them, or parts of them, to the FMI.
The powers of the resolution authority in principle also extend to requesting changes in the operation of
FMIs in order to ensure resolvability. However, it still needs to be established what this may mean in practice, e.g. to request changes in business models (e.g. separation of services or restricting service offering) or to limit the size of operations or number of links etc.
12.
To what extent do you think that CCPs/CSDs in cooperation with their users would be able to define efficient recovery and resolution plans on the basis of amendments to their contractual laws?
Again, distinction must be made between recovery and resolution. Recovery is mainly the responsibility of the FMI itself and requires the contractual agreement by its participants. For example, the FMI’s recovery

9 plans may foresee the allocation of uncovered losses and liquidity shortfalls to its participants. Similarly, an
FMI’s recovery plans may foresee recapitalisation if its capital falls below a critical level. For such plans to be implementable, the FMI needs the contractual agreement by its participants and/or owners. Resolution, in contrast, is based on statutory rules that the FMI cannot amend.
13.
Should resolution be triggered when an FMI has reached a point of distress such that there are no realistic prospects of recovery over an appropriate timeframe, when all other intervention measures have been exhausted, and when winding up the institution under normal insolvency proceedings would risk causing financial instability?
Resolution should be initiated once an FMI is no longer viable or likely to be no longer viable, and has no reasonable prospect of sustaining or recovering viability. For an FMI, the possible stages which may precede an FMI’s entry into resolution include the following: (a) the FMI’s recovery plans have failed or have not otherwise been implemented in a timely manner; or (b) the relevant authority determines that recovery plans will not work, no further remedial action is feasible and the FMI needs to be placed into resolution immediately.
14.
Should these conditions be refined for FMIs? For example, what would be suitable indicators that could be used for triggering resolution of different FMIs? How would these differ between FMIs?
Some refinement and distinction is indeed needed. For example, for FMIs that assume credit risks, and are responsible for collecting from and making payments to their participants on a daily basis, non-viability may occur suddenly, as the result of an extraordinary default beyond the FMI’s resources. Once the conditions to trigger the resolution have been met, the resolution authority must determine whether to use its resolution tools or whether it can meet its statutory objectives by allowing the FMI to be placed into a special insolvency regime or other scheme for orderly wind-down.
15.
Should there be a framework for authorities to intervene before an FMI meets the conditions for resolution when they could for example amend contractual arrangements and impose additional steps, for example require unactivated parts of recovery plans or contractual loss sharing arrangements to be put into action?
As mentioned above and noted in the CPSS-IOSCO consultative report on recovery and resolution of FMIs, an FMI’s direct supervisor, regulator or overseer is responsible for ensuring and assessing the recovery plan’s adequacy. Authorities should continually assess an FMI on the adequacy of these plans (taking into account the risk profiles of both the FMI and its major market participants) and, where deficiencies exist, authorities must have the necessary powers to enforce observance of the Principles .
Moreover, it is possible that an FMI’s execution of relevant recovery measures may be suboptimal in terms of timeliness, judgment or discretion. In addition, factors such as unanticipated conflicts of interest, uncontrollable external factors and human error could result in poor or inadequate execution. In such cases,

10 the relevant authorities should have the necessary powers to require implementation of recovery measures and drive optimal execution. These powers may include issuing orders, imposing fines or penalties, or even forcing a change of management, as appropriate.
16.
Should resolution authorities of FMIs have the above powers? Should they have further powers to successfully carry out resolution in relation to FMIs? Which ones?
The ECB agrees that resolution authorities should have these powers that reflect and correspond to the resolution powers as outlined in the Key Attributes .
17.
Should they be further adapted or specified to the needs of FMI resolution?
The resolution powers as outlined in the Key Attributes need to be adapted to capture the specific nature of
FMIs. To this end, the Commission may wish to consider the CPSS-IOSCO consultative report on recovery and resolution for FMIs which already contains a number of adjustments to the Key Attributes that are necessary. CPSS-IOSCO will continue reviewing and adjusting the Key Attributes in the light of the responses to the public consultation launched by CPSS and IOSCO. For the sake of ensuring international consistency, any EU resolution regime should be in line with the outcome of this work
18.
Do you consider that temporary stay on the exercise of early termination rights could be a relevant tool for FMIs? Under what conditions? How should it apply between interoperated FMIs? How should it be articulated with similar powers to impose temporary stays in the bank resolution framework?
The ECB has not established a firm view on this issue. However, as highlighted in the CPSS-IOSCO consultative report on recovery and resolution for FMIs, there are a number of reasons why it is important to ensure that the commencement of resolution measures cannot be used as an event of default to trigger termination and closeout netting obligation. In particular, by preventing a termination of obligations due to the commencement of resolution measures through a temporary stay, the resolution authority gains time to assess the situation and determine how best to exercise its resolution powers. A stay on early termination rights may be particularly important where the FMI being resolved is a CCP. The exercise of early termination rights by participants due to the commencement of resolution measures is likely to hamper the objective of resolution by preventing the CCP from continuing critical operations and services. Stays should also consider the safety and orderly operations of any linked FMI.
19.
Do you consider that moratorium on payments could be a relevant tool for all FMIs or only some of them? If so, under what conditions?
In certain circumstances, there can be a trade-off between the need to preserve the continuity of services by the FMI on the one hand and the desire to avoid liquidity strains for the FMI on the other hand. While it cannot be excluded that in a few selected and very specific cases yet to be defined, suspension of payments

11 could be appropriate, as a general rule it should not be permitted. For most FMIs, their ability to continue to make payments is a fundamental part of the service they provide, whether this is continuing to settle transactions or, in the case of CCPs, receiving and returning initial margin and transferring variation margin payments between participants on a regular basis to limit the build-up of large exposures based on market moves. A resolution authority’s decision to impose a moratorium to prevent outgoing payments by the FMI even for a short period is therefore likely to carry the risk of continuing or even amplifying systemic disruption. In particular, a moratorium may cause a build-up of exposures between participants in what may be volatile market conditions, place increased liquidity strains on some market participants, and cause generalised illiquidity in certain financial markets. Accordingly, a moratorium on payments in a CCP, a payment system or a CSD would mean a full or partial stoppage of the system, probably defeating the objective of continuity of critical operations and services.
20.
Which reorganisation tools could be appropriate for resolving different types and CSDs and CCPs?
What would be their advantages and disadvantages?
Although desirable, it is probably not feasible to determine a priori which reorganisation tool(s) will be most appropriate in a particular case and for a particular FMI. Rather, the relevant authorities will need to make that determination on an ad-hoc basis in reflection of the specific circumstances respectively.
In general, a resolution authority may consider an orderly wind down of the FMI (provided the primary objective, i.e. continuity of services, is ensured), the transfer of critical functions to a solvent third party, and the creation of a bridge institution. In the case of FMIs, there may be few alternative providers of critical operations and services, and there could be practical and operational barriers to immediate transfer of activity to alternative providers. Therefore, the power to establish a bridge institution will be particularly important.
In view of the creation of bridge institution, two aspects deserve further consideration. First, in the case of
DVP settlement, to the extent that cash settlement does not take place in CSD cash accounts, a bridge institution can only ensure the continuity of services if it has an arrangement with the institution that operates cash settlement. Second, to the degree that links with other FMIs are essential for the smooth continuity of the FMI (eg in the case of links between CSDs), a transfer to a bridge institution can only be performed in a sound way if the links are also transferred to the bridge institution. See the CPSS-IOSCO consultative report for further details.

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There is a need to distinguish between loss allocation tools for recovery and resolution respectively. While the former are part of the FMI’s own rules as required by the Principles, the latter need to be defined by statutory law.
For recovery, there is a need for re-establishing a matched book after a participant has defaulted. “Tear-up” can be a helpful tool to this end, but will require some form of loss sharing. Partial tear-up (limited to those contracts where standards default procedures such as auctions are not possible) may be preferable over full tear-up as the latter may provide disincentives to participants to use CCPs and may thus jeopardise CCPs as such. As regards loss sharing methods for tear up, a “non-competitive” solution could be considered where losses are shared equally among all participants, however with some flexibility to capture the specifics of certain products such as CDS. Moreover, some participants (e.g. those that have a claim on the CCP) could be in a better situation to cope with losses than others, which would call for a more competitive loss sharing arrangements.
For resolution, loss sharing rules should be designed in a way that the default of a CCP has the least systemic impact, avoids recourse to taxpayer money, and thus achieves a better outcome than if regular insolvency rules were applied. In this context, there is a trade-off: while full and unlimited sharing of potential losses would help to avoid the use of taxpayer money, such unlimited loss sharing among survivors create uncertainties for participants and may deter participants from using the CCP. Similar to the foreseen resolution regime for banks, arrangements for assigning losses to the shareholders/owners of a CCP could be considered, for example on the basis of additional cash calls equal to a multiple of the owners’ contributions to the CCP’s waterfall. Moreover, while clients need to be protected from a direct participant’s default in principle, it may nevertheless be helpful to include clients in the loss sharing arrangement as this would allow allocating losses to a larger number of entities, thus reducing the burden for any individual entity and reducing the systemic impact that a CCP default would have.
As explained above, while recovery is based on the FMI’s own rules including contractual arrangements with participants who need to agree on and accept the FMI’s rules when joining the FMI as members, resolution tools are based on statutory rules that need to be defined by means of regulations and thus go beyond contractual arrangements.

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The international nature of many FMIs may mean that several supervisory, regulatory, oversight and resolution authorities may have responsibilities for an individual FMI. Cooperation and coordination among and between these authorities can help to ensure that their respective responsibilities can be fulfilled efficiently and effectively during normal times and in times of crisis. Central banks, market regulators and overseers have a long history of cooperating and coordinating their efforts related to FMIs, consistent with relevant international standards. The ECB believes Responsibility E of the Principles provides the key elements and gives guidance on how to device such cross-border cooperation also for the purpose of recovery and resolution. As noted above, the CPSS and IOSCO are currently refining and elaborating international standards for recovery and resolution including cooperation among relevant authorities, The
ECB urges the Commission to carefully consider the outcome of that work for the design of those provisions of the forthcoming EU resolution framework that focus on cooperation among authorities.
The European regulation for CCPs and trade repositories (EMIR) assigns regulatory responsibility for FMIs to supervisory colleges. In line with that approach, resolution colleges may play a role and could be helpful for the purpose of resolving FMIs in a cross-border context. The resolution of an FMI may require the provision of temporary funding in some circumstances, central banks may play an important role in the resolution process that goes beyond and adds to their responsibility as overseers of FMIs. Therefore, the central bank of issue needs to be involved in such resolution colleges.
At the same time, however, the EU is currently in a process of moving towards a banking union including an integrated resolution framework as one of three pillars constituting a banking union. The establishment of a
European Resolution Authority represents a critical next step to this end. While the creation of a single

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European supervisor for FMIs has not yet been taken forward, there is nevertheless a strong case for a centralised EU resolution mechanism for FMIs for a number of reasons.
First, the resolution of FMIs requires swift decision taking that cannot afford lengthy coordination processes among a multitude of authorities. For example, supervisory authorities may assess a given situation differently. Such differences in the assessment of available information in an event of urgency may complicate the finalization of the resolution process. A common resolution structure, with a unified resolution regime and a single resolution authority would avoid such problems and facilitate swift decision making. Second, many FMIs are so large in size and scope that their failure would, on the one hand, endanger the financial system of several countries at the same time, but on the other hand, be too large for the national government of the home country to be supported in case of stress and thereby causing or exacerbate funding problems of the sovereign, which might further destabilize the financial sector. For these reasons, a centralised resolution authority for FMIs would be very beneficial especially as financial stability and the implementation of monetary policy critically depend on the smooth functioning of the payment and settlement systems.
Against this background, the ECB would propose designating a single centralised European Resolution
Authority for FMIs even before the current framework for the regulation and oversight of FMIs has been moved further ahead towards greater centralisation. The ECB believes that ESMA could act as the single resolution authority for FMIs, in cooperation with the ECB in view of its roles both as future European banking supervisor and as provider of temporary funding that might be needed for resolving FMIs in some circumstances.
As outlined above, the ECB takes the view that the effective and efficient resolution of FMIs in a crossborder context requires the establishment and designation of a single European resolution authority for FMIs even in the absence of a centralised EU framework for the regulation and oversight of FMIs. The resolution of FMIs requires swift decision taking that cannot afford lengthy coordination processes among a multitude of authorities. Therefore, as explained above, the ECB believes that ESMA could act as the single resolution authority for FMIs, in cooperation with the ECB in view of its roles both as future European banking supervisor and as provider of temporary funding that might be needed for resolving FMIs in some circumstances.

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When applying the “no creditor worse off” concept to FMIs, the starting point at which further losses are imposed in resolution should be based on claims as they exist following the FMI’s ex ante rules and procedures for addressing uncovered credit and liquidity needs and the replenishment of financial resources.
In fact, many FMIs have ex ante arrangements within their rules to mutualise losses among participants. For loss allocation which is performed at the instigation of the authorities in the course of resolution, the approach should seek to respect this ex ante agreed “mutuality” principle. But where such mutuality of losses is not a feature of the FMI’s rules, the principle of respecting the hierarchy of claims while providing flexibility to depart from the principle of equal treatment of creditors of the same class may be appropriate.
CPSS and IOSCO will provide further guidance in this regard in their forthcoming work ion recovery and resolution.