The European Commission has proposed rules aimed at strengthening Europe's financial system further by providing for the resolution and recovery of central counterparties (CCPs), which protects taxpayers from incurring costs if a CCP fails.

A plan for when things go wrong

According to the Commission, the proposed rules ensure that CCPs can be dealt with effectively when things go wrong. The proposed rules have the following effects:

• they determine how losses would be shared;
• they require CCPs to draw up recovery plans which would include measures to overcome any form of financial distress which would exceed their default management resources and other requirements under EMIR;
• they require resolution authorities (EU national authorities) to prepare resolution plans on how to restructure CCPs and maintain their critical functions in the unlikely event of failure;
• they grant CCP supervisors specific powers to intervene in the operations of CCPs where their viability is at risk but before they reach the point of failure or where their actions may be detrimental to overall financial stability.

What is a central counterparty?

CCPs are private financial institutions that act as the intermediary between the buyer and the seller of a security, when certain financial instruments are traded, including bonds, equities, derivatives and commodities. They have increased in importance since the 2008 financial crisis and a large proportion of the €500 trillion of derivatives contracts that are outstanding globally are cleared by 17 CCPs across Europe. According to the Commission, the scale and importance of CCPs in Europe and globally has nearly doubled since the post-crisis G20 commitment to clear standardised over-the-counter (OTC) derivatives through CCPs. The European Market Infrastructure Regulation (EMIR) was passed in 2012 to regulate CCPs and OTC derivatives.

This video explains more about CCPs, what they do and who is responsible if they were to fail:

'Sweeping powers'?

Vice-president Valdis Dombrovskis said that the new rules will complement the stronger regulation of derivatives markets that the EU put in place after the 2008 financial crisis. Bloomberg describes these proposed rules as the EU handing “sweeping powers” to authorities to deal with derivatives clearing houses.

Who are the EU's 17 CCPs?

1. Nasdaq OMX Clearing (Sweden)
2. European Central Counterparty (Netherlands)
3. KDPW_CCP (Poland)
4. Eurex Clearing (Germany)
5. Cassa di Compensazione e Garanzia (Italy)
6. LCH SA (France)
7. European Commodity Clearing (Germany)
8. LCH Ltd (UK)
9. Keler CCP (Hungary)
10. CME Clearing Europe Ltd (UK)
11. CCP Austria Abwicklungsstelle für Börsengeschäfte GmbH (Austria)
12. LME Clear (UK)
13. BME Clearing (Spain)
14. OMIClear - C.C. (Portugal)
15. ICE Clear Netherlands (Netherlands)
16. Athens Exchange Clearing House (Athex Clear) (Greece)
17. ICE Clear Europe Limited (ICE Clear Europe) (UK)