WHAT IS THE AIM OF THE REGULATION?
- The regulation lays down rules and procedures for the recovery and resolution of central counterparties (CCPs)1.
- It is designed to ensure CCPs have measures in place to help them recover from financial distress or can continue their main tasks if they are failing, or likely to fail, while winding up other activities through normal insolvency procedures.
- The overall aim is to preserve financial stability and minimise the costs to taxpayers of any CCP failure.
KEY POINTS
Each European Union (EU) Member State has the following responsibilities.
- Appointing one or more resolution authorities. These:
- may be national central banks, ministries or public authorities with administrative powers;
- have the expertise, resources, operational capacity and extensive powers to act quickly and flexibly;
- are in charge of resolution planning, including resolvability assessments and, where necessary, exercising resolution powers.
- Designating a single ministry with overall responsibility for exercising the functions entrusted to the ministries under the legislation.
- Applying penalties for breaches of the regulation.
Resolution authorities establish, manage and chair a resolution college. This includes the relevant authorities and provides a framework to:
- share information;
- draw up resolution plans;
- assess a CCP’s resolvability and possible obstacles;
- coordinate public information about resolution plans and strategies.
The European Securities and Markets Authority (ESMA):
Competent authorities, resolution authorities and ESMA:
- cooperate closely to carry out the tasks set out in the regulation;
- base decisions on principles such as:
- proportionality in view of the CCP’s legal form, size, complexity and liquidity,
- the need for efficacy and timeliness, the need to keep costs down and the need, as far as possible, to avoid the use of public finance.
Recovery planning requires CCPs to draw up and maintain a recovery plan that:
- sets out measures, with or without a default, to restore financial soundness;
- includes measures to address all possible risks, absorb losses and replenish financial resources;
- contains indicators based on a CCP’s risk profile;
- does not assume access to public finance or central bank liquidity;
- considers the interests of all stakeholders;
- ensures clearing members do not have unlimited exposure to the CCP.
It also requires the competent authority, supervisory college and resolution authority to assess the recovery plan and consider any changes.
Resolution planning requires the following.
- The resolution authority of the CCP has to draw up a resolution plan that:
- sets out how it would use its resolution powers to absorb losses and ensure the continuity of the CCP’s critical functions;
- takes account of the impact of the plan on clearing members, financial markets and the financial system;
- does not assume access to public finance or central bank help;
- makes prudent assumptions about finance that might be available.
- CCPs under resolution have to cooperate with the resolution authority and provide all the necessary information.
- The resolution college has to agree on the plan, including any changes, within 4 months of receiving it.
Assessing resolvability requires the resolution authority, coordinating with the resolution college, to:
- assess whether a CCP is resolvable, to enable it to continue operating its critical functions;
- identify any obstacles to resolvability and instruct the CCP to take action to remove them.
Early intervention measures enable a competent authority to instruct a CCP it considers could be facing financial problems to:
- take corrective action;
- remove some or all of the senior management or board members.
Resolution authorities take special account of the following when implementing their plans.
- Objectives:
- continuity of the CCP’s critical functions and of its key links with other financial markets’ infrastructures;
- avoidance of damage to the financial system;
- protection of public funds.
- Conditions:
- actual or likely failure of a CCP;
- absence of an alternative private sector solution;
- resolution being in the public interest.
- Valuation:
- two assessments to ensure a fair, prudent and realistic appreciation of the CCP’s assets, liabilities, rights and obligations.
- Safeguards:
- shareholders, clearing members and other creditors should not lose more than if the resolution authority had not intervened (‘no creditor worse off’ principle);
- clients and indirect clients to which losses have been passed on by their clearing members have the right to a proportionate share of the compensation that those clearing members may receive;
- anyone affected by a crisis prevention measure order or resolution action has a right of appeal.
Resolution authorities can apply the following measures, individually or in combination.
- Position and loss allocation. Terminating contracts, reducing a CCP’s payment obligations to non-defaulting clearing members or requiring the latter to make a cash contribution to the CCP.
- Write-down and conversion. Reducing or converting the size of instruments of ownership, debt or other unsecured liabilities, requiring a CCP to provide and implement a business reorganisation plan.
- Sale of business. Selling ownership or any assets, rights, obligations or liabilities of a CCP in the resolution procedure.
- Bridge CCP. Transferring temporarily to another CCP (bridge CCP) ownership or any assets, rights, obligations or liabilities of a CCP in the resolution procedure.
- Alternative funding. Contracting to borrow or obtain other forms of financing to address temporary cash-flow problems.
Member States may, as a last resort, if a CCP failure threatens a systemic crisis, inject cash or take it into public ownership (government stabilisation tools), provided the measures are temporary and comply with EU State-aid rules and the Member State has arrangements to recoup the public funds.
The regulation amends the following:
Under the review procedure:
- ESMA assesses its staffing and resources needs by 12 February 2024;
- the Commission submits to the European Parliament and the Council of the European Union a report on the legislation by 12 February 2026 and a report on the effectiveness of the governance arrangements for the recovery and resolution of CCPs in the EU by 12 August 2027.
Delegated acts
The Commission has adopted seven delegated acts.
- Delegated Regulation (EU) 2023/840, which supplements Regulation (EU) 2021/23 setting regulatory technical standards specifying the methodology for calculation and maintenance of the additional amount of pre-funded dedicated own resources of the CCP (see Article 9).
- Delegated Regulation (EU) 2023/450, which supplements Regulation (EU) 2021/23 setting regulatory technical standards specifying the order in which CCPs are to pay the recompense to non-defaulting clearing members for their loss, the maximum number of years during which those CCPs are to use a share of their annual profits for such payments to possessors of instruments recognising a claim on their future profits and the maximum share of those profits that is to be used for those payments (see Article 20).
- Delegated Regulation (EU) 2023/451, which specifies the factors to be taken into consideration by the competent authority and the supervisory college when assessing the recovery plan of CCPs.
- Delegated Regulation (EU) 2023/1192, which sets regulatory technical standards specifying the content of the written arrangements and procedures for the functioning of the resolution colleges.
- Delegated Regulation (EU) 2023/1193, which sets regulatory technical standards specifying the contents of the resolution plan.
- Delegated Regulation (EU) 2023/1615, which sets regulatory technical standards specifying the conditions under which compensation, cash equivalent of such compensation or any proceeds that are due pursuant to Regulation (EU) 2021/23 are to be passed on to clients and indirect clients and the conditions under which passing on is to be considered proportionate.
- Delegated Regulation (EU) 2023/1616, which sets regulatory technical standards specifying:
- the circumstances in which a person is deemed to be independent from the resolution authority and from the CCP;
- the methodology for assessing the value of assets and liabilities of a CCP;
- the separation of the valuations;
- the methodology for calculating the buffer for additional losses to be included in provisional valuations; and
- the methodology for carrying out the valuation for the application of the ‘no creditor worse off’ principle.
- Delegated Regulation (EU) 2024/450, which sets regulatory technical standards specifying the minimum elements to be included in a business reorganisation plan and the criteria to be fulfilled for its approval by the resolution authority.
FROM WHEN DOES THE REGULATION APPLY?
It entered into force on 11 February 2021. The key provisions related to recovery planning have applied since 12 February 2022 and most of the rest of the regulation has applied since 12 August 2022.
BACKGROUND
- CCPs are an essential part of the financial system as they manage a significant amount of counterparty risk and act as a link between multiple banks, other financial counterparties and corporations.
- The adoption of the European market infrastructure regulation, Regulation (EU) No 648/2012, ensured CCPs helped increase market transparency following the 2008 financial crisis.
- For further information, see:
KEY TERMS
- Central counterparty. An entity that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer.
MAIN DOCUMENT
Regulation (EU) 2021/23 of the European Parliament and of the Council of 16 December 2020 on a framework for the recovery and resolution of central counterparties and amending Regulations (EU) No 1095/2010, (EU) No 648/2012, (EU) No 600/2014, (EU) No 806/2014 and (EU) 2015/2365 and Directives 2002/47/EC, 2004/25/EC, 2007/36/EC, 2014/59/EU and (EU) 2017/1132 (OJ L 22, 22.1.2021, pp. 1–102).
RELATED DOCUMENTS
Commission Delegated Regulation (EU) 2023/450 of 25 November 2022 supplementing Regulation (EU) 2021/23 of the European Parliament and of the Council with regard to regulatory technical standards specifying the order in which CCPs are to pay the recompense referred to in Article 20(1) of Regulation (EU) 2021/23, the maximum number of years during which those CCPs are to use a share of their annual profits for such payments to possessors of instruments recognising a claim on their future profits and the maximum share of those profits that is to be used for those payments (OJ L 67, 3.3.2023, pp. 5–6).
Commission Delegated Regulation (EU) 2023/451 of 25 November 2022 specifying the factors to be taken into consideration by the competent authority and the supervisory college when assessing the recovery plan of central counterparties (OJ L 67, 3.3.2023, pp. 7–16).
Commission Delegated Regulation (EU) 2023/840 of 25 November 2022 supplementing Regulation (EU) 2021/23 of the European Parliament and of the Council with regard to regulatory technical standards specifying the methodology for calculation and maintenance of the additional amount of pre-funded dedicated own resources to be used in accordance with Article 9(14) of that Regulation (OJ L 107, 21.4.2023, pp. 29–38).
Commission Delegated Regulation (EU) 2023/1192 of 14 March 2023 supplementing Regulation (EU) 2021/23 of the European Parliament and of the Council with regard to regulatory technical standards specifying the content of the written arrangements and procedures for the functioning of the resolution colleges (OJ L 158, 21.6.2023, pp. 31–47).
Commission Delegated Regulation (EU) 2023/1193 of 14 March 2023 supplementing Regulation (EU) 2021/23 of the European Parliament and of the Council with regard to regulatory technical standards specifying the contents of the resolution plan (OJ L 158, 21.6.2023, pp. 48–61).
Commission Delegated Regulation (EU) 2023/1615 of 3 May 2023 supplementing Regulation (EU) 2021/23 of the European Parliament and of the Council with regard to regulatory technical standards specifying the conditions under which compensation, cash equivalent of such compensation or any proceeds that are due pursuant to Article 63(1) of that Regulation are to be passed on to clients and indirect clients and the conditions under which passing on is to be considered proportionate (OJ L 199, 9.8.2023, pp. 9–13).
Commission Delegated Regulation (EU) 2023/1616 of 3 May 2023 supplementing Regulation (EU) 2021/23 of the European Parliament and of the Council with regard to regulatory technical standards specifying the circumstances in which a person is deemed to be independent from the resolution authority and from the central counterparty, the methodology for assessing the value of assets and liabilities of a central counterparty, the separation of the valuations, the methodology for calculating the buffer for additional losses to be included in provisional valuations, and the methodology for carrying out the valuation for the application of the ‘no creditor worse off’ principle (OJ L 199, 9.8.2023, pp. 14–33).
Report from the Commission to the European Parliament and the Council on the treatment of central counterparty equity in the write-down and conversion tool under Regulation (EU) 2021/23 (COM(2022) 393 final, 10.8.2022).
Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (codification) (OJ L 169, 30.6.2017, pp. 46–127).
Successive amendments to Directive (EU) 2017/1132 have been incorporated into the original text. This consolidated version is of documentary value only.
Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (OJ L 337, 23.12.2015, pp. 1–34).
See consolidated version.
Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (OJ L 173, 12.6.2014, pp. 84–148).
See consolidated version.
Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, pp. 190–348).
See consolidated version.
Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (OJ L 225, 30.7.2014, pp. 1–90).
See consolidated version.
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, pp. 1–59).
See consolidated version.
Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15.12.2010, pp. 84–119).
See consolidated version.
Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies (OJ L 184, 14.7.2007, pp. 17–24).
See consolidated version.
Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (OJ L 142, 30.4.2004, pp. 12–23).
See consolidated version.
Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (OJ L 168, 27.6.2002, pp. 43–50).
See consolidated version.
