Resolution of CCPs

When does a CCP go into resolution?

As a rule, all CCPs can go bankrupt, just like any other financial institution. But not if the impact on the economy, financial stability or public finances is too great. If any of these risks looms, we take action in our capacity as the national resolution authority, taking the CCP into resolution. We have various instruments at our disposal to do so (see Preparation and tools). For example, the failing CCP may be relaunched, either independently or as part of another institution, or it may be placed in a temporary bridge institution.

The last resort

Resolution is the last resort. Each Dutch CCP is subject to regular supervision by DNB and the Dutch Authority for the Financial Markets (AFM). The European Regulation on a framework for the recovery and resolution of central counterparties requires CCPs to prepare a recovery plan. The recovery plan sets out how a CCP will restore sound operational management, in the event that it breaches or risks breaching the prudential rules. If the CCP is unable to do so on its own, or if we expect that recovery measures will not be able to prevent it from failing, it will be wound up either by a liquidator in bankruptcy proceedings or by us as part of its resolution.

Which CCPs may go into resolution?

We only take a CCP into resolution if the social impact of bankruptcy is considered to be too substantial, while there is no reasonable prospect of alternative private measures and the resolution objectives cannot be achieved (to the same extent) in normal insolvency proceedings.

A CCP’s bankruptcy could have a major adverse impact, given that CCPs play a pivotal role in the financial system. They are the linking pin between the buyer and the seller of shares or derivatives and guarantee the rights and obligations associated with the transaction. The use of CCPs makes banks, pension funds and insurers less vulnerable to the risk of a counterparty default. CCPs thus contribute to a more stable financial system. Therefore, it is important that if a CCP collapses, any critical functions are preserved. This reduces the likelihood of the financial system being disrupted, as transactions can no longer be performed, and of the CCP’s failure spreading across the financial market.

In assessing whether a CCP fulfils critical functions, we consider the following aspects:

• nature and scope of the CCP’s operations
• ownership, legal and organisational structure
• risk profile
• substitutability
• the CCP’s interconnectedness with the financial system

Preparation and tools

Resolution calls for careful preparation. This is why we prepare a resolution strategy and a resolution plan for each CCP, together with the Resolution Colleges (see International cooperation). They describe how best to intervene if a CCP gets into trouble, and whether we expect to let the CCP go bankrupt or resolve it if it fails. We have several types of resolution tools at our disposal, such as position and loss allocation tools, the write-down and conversion tool for shareholders and creditors, the sale of business tool and the bridging CCP tool. We can use these tools to ensure that a CCP survives in whole or in part.

Our tasks and powers

Our main duties and powers in the field of resolution are laid down in the European Regulation on a framework for the recovery and resolution of central counterparties and further detailed in various Dutch laws such as the Banking Act (Bankwet), the Financial Supervision Act (Wet op het financieel toezicht) and the Bankruptcy Act (Faillissementswet). Pursuant to the Regulation, DNB has been designated under Dutch law as the national resolution authority for Dutch CCPs.

Independence

Within DNB, our CCP resolution task is separate from CCP supervision, because our resolution task might pursue different objectives from our supervision task. To avoid conflicts of interest, the CCP resolution task is set up independently – in terms of staffing, reporting lines and decision-making processes – from our other tasks, including CCP supervision and banking supervision. This is also required by the European Regulation on a framework for the recovery and resolution of central counterparties. One member of our Executive Board is responsible for resolution. This Executive Board member, Nicole Stolk, has no direct responsibility for CCP or banking supervision.

International cooperation

Given the cross-border nature of CCPs and their multifaceted interconnectedness with domestic and foreign financial institutions, resolution strategies and plans must be prepared through international cooperation between relevant competent authorities. This is why resolution planning for CCPs takes place in tandem with other authorities through what are known as Resolution Colleges. We host and chair the Resolution Colleges to be established for two Dutch CCPs (Cboe Clear Europe and ICE Clear NL). Participants in a Resolution College include various domestic and foreign authorities, such as supervisors and resolution authorities of banks affiliated with the relevant CCP, as well as supervisors of exchanges and trading venues to which the CCP provides its services. Bringing together all these different perspectives allows us to map the possible consequences of a CCP’s failure as accurately as possible and to dovetail the chosen strategy accordingly.

Together, the authorities participating in the Resolution College decide on the resolution plan we propose. Should the participants have diverging views, European Securities and Markets Authority (ESMA) can assist in reaching a joint decision.