On August 23, 2023, the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report on current central counterparty (CCP) practices. The report highlights the need for CCPs to have adequate resources and appropriate tools to address non-default losses (NDL).

CCPs have become increasingly important to the financial system for managing counterparty risk, especially since the introduction of the clearing obligation for standardised OTC derivatives following the 2007/09 global financial crisis. Therefore, the financial resilience of CCPs in case of losses and liquidity shortfalls is critical for financial stability – whether these losses arise from the default of CCP clearing members or from events other than clearing member defaults, such as investment risk or cyber attacks.

Understanding current CCP practices

The purpose of the report is to facilitate the sharing and common understanding of existing practices and to advance industry efforts and foster dialogue on CCPs’ management of potential NDLs. It also aims to assist relevant authorities to better understand the current state of CCPs’ practices for addressing NDLs, including areas where further improvements might be helpful.

However, while the potential for losses arising from clearing member defaults is well understood, there is limited common understanding of how CCPs manage and address NDLs. If not managed properly, NDLs can threaten a CCP’s viability as a going concern and its ability to continue providing critical services to its participants and the markets it serves. Therefore, according to the Principles for Financial Market Infrastructures (PFMI), CCPs must have policies, procedures and plans for addressing NDLs, in addition to a sound risk management framework to mitigate and manage those risks.

In August 2022, CPMI and IOSCO published a discussion paper on central counterparty practices to address non-default losses. Taking into account the comments received in response to that discussion paper, the new report updates it with a more thorough description of current practices that CCPs employ to address NDLs.

This report does not create additional standards for CCPs or other financial market infrastructures (FMIs), nor does it provide guidance on existing standards.

Financial market infrastructures

Given the wide range of practices reported and the divergent views reported by the industry through the consultation, CPMI and IOSCO intend to undertake additional work on NDLs across all financial market infrastructures. These include:

• an assessment of the implementation of the Principles for Financial Market Infrastructures to improve overall resilience; and
• guidance to clarify expectations on practices to address NDLs and general business risk. 

Further engagement with industry stakeholders will also be undertaken to inform a public consultation in the near term on further guidance or recommendations with respect to NDLs.