Central counterparties (CCPs) are required to develop recovery plans and ensure they can maintain continuity of critical services in times of market stress. One threat to CCP viability is the default of one or more clearing member(s) (CM(s)). In January 2015, ISDA proposed a recovery framework to address this specific threat. Among other things, ISDA contemplated a situation where a CCP may be able to auction most of the hedged portfolio of the defaulting CM(s), but the remainder of the portfolio attracts no bids and therefore creates open exposure for the CCP. To enable the CCP to extinguish this exposure, ISDA proposed that the CCP adopts rules permitting partial tear-up. Partial tear-up would permit a CCP to re-establish a matched book with respect to the remainder. ISDA has come up with a non-exhaustive list of partial tear-up structures. All structures assume that the CCP terminates identified positions at the last available price for that contract (i.e., at "fair-value"), and that partial tear-up is not a means of loss allocation but solely aimed at enabling the CCP to re-establish a matched book. The white paper sets out a number of factors to be considered by the CCP in assessing whether its partial tear-up regime could be construed to contravene the list of relevant accounting assumptions.

The paper aims to identify the potential accounting consequences of different CCP partial tear-up structures under US GAAP and IFRS. A preliminary examination indicates it is possible for a CCP to design and implement a partial tear-up regime that does not frustrate the accounting considerations outlined in section A of this paper.