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European regulators advise CCPs to review their TLAC processes 

December 5, 2014
COO Connect

The European Commission and other global regulators are assessing the options by which to deal with the failure of a central counterparty clearing house (CCP).

The shift to mandatory clearing of over-the-counter (OTC) derivatives as mandated under the Dodd-Frank Act and European Market Infrastructure Regulation (EMIR) has turned CCPs into systemically important financial institutions. Some have gone further and referred to CCPs as “Super” systemically important financial institutions. As a result, a number of global bodies including the Bank for International Settlements (BIS) and the International Organisation of Securities Commissions (IOSCO) are urging CCPs to have recovery plans in place.

“The impact of a CCP failure – were it burn through its default waterfall and CCPs’ 25 per-cent capital contribution, and clearing member and default funds – would be catastrophic. CCPs may need to look at having in place some extra layer of total loss absorbing capacity (TLAC) according to some market participants and central banks. We are looking at this challenge, and what we need are simple rules in place to prevent such a scenario from occurring,” said Patrick Pearson, head of market infrastructure at the European Commission, speaking at the Global Custody Forum in London.

Read more: COO Connect

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