Two international regulatory organizations have made recommendations on how clearinghouses and other so-called “financial market infrastructures” (FMIs) should plan to recover from market disruption events that might imperil their existence. The organizations are the Committee on Payments and Market Infrastructures of the Bank for International Settlements and the International Organization of Securities Commissions. According to the regulatory organizations, all FMIs should have a “comprehensive and effective recovery plan” that includes rules-based mechanisms to “allocate any uncovered losses and cover liquidity shortfalls”—whether they are caused by a participant’s default or otherwise. In addition, all FMIs should have the capability to replenish their financial resources “in order to continue to provide critical services,” while clearinghouses should also be able to reinstate a matched book. To recover from financial losses, the regulatory organizations recommend that FMIs “consider having explicit insurance or indemnity agreements” as a backstop to having sufficient capital and a “viable plan to recapitalize” in the first place. Clearinghouses’ capability to address position imbalances may derive through incentives to various participants, but the regulatory organizations caution that a clearinghouse “should also have a mandatory, … agreed mechanism to re-establish a matched book in case such voluntary efforts fail.” The regulatory organzations also argue that FMIs should have the ability to absorb losses resulting from business operations, and not pass on such losses to participants. According to the regulatory organization, "[a]llocation of such losses should begin with the premise that the losses are first charged against the FMI's capital, i.e., they should be borne in the first instance by the owners of the FMI." Finally, the regulatory organizations stress that resolution processes should be “transparent and allow those who would bear losses and liquidity shortfalls to measure, manage and control their potential exposure.”
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CPMI/IOSCO advises clearinghouses how to recover from threats to their viability
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