CFTC Staff Issues Guidance to Clearinghouses on Recovery Plans and Wind-Down Plans

The U.S. Commodity Futures Trading Commission’s (CFTC) Division of Clearing and Risk (DCR) today issued guidance to clearinghouses to further the development of Recovery Plans and Wind-down Plans. For clearinghouses, or Derivatives Clearing Organizations (DCOs), the development of these plans is a critical element of risk management and contingency planning to address the extreme circumstances that could threaten DCOs’ viability and financial strength, and is required by CFTC regulations.

The CFTC now requires that standard derivatives trades must be cleared, and since the financial crisis, clearing of swaps has increased from approximately 15 percent of the market in 2007 to 75 percent today. As the reliance on clearing has increased over time, so has the CFTC’s focus on the safety and soundness of clearinghouses. The CFTC has worked to implement a regulatory regime that ensures clearinghouses effectively minimize risk and promote financial stability. The Commission has overhauled its rules regarding clearinghouse oversight, strengthened requirements regarding risk management and transparency, bolstered customer protection measures, and expanded and enhanced programs related to examinations, compliance, and risk surveillance.

The guidance announced today highlights certain topics that clearinghouses should analyze in developing a Recovery Plan and a Wind-down Plan. The guidance sets forth questions that clearinghouses should consider (1) in evaluating whether particular tools for recovery and orderly wind-down should be included in their Recovery Plans and Wind-down Plans, and (2) in designing proposed rule changes to support the inclusion of particular tools in such plans.

Having these plans will enable clearinghouses to better prepare for scenarios that could lead to uncovered credit losses, liquidity shortfalls, or other conditions that could threaten a clearinghouse, and will help clearinghouses develop viable strategies to manage such challenges. In addition, such analysis promotes the ability of clearinghouses to more effectively and efficiently meet their obligations promptly, thereby reducing the possibility of market disruptions and financial losses to clearing members and their customers, and avoiding harm and market disruption.

A clearinghouse’s Recovery Plan and Wind-down Plan are also important to resolution planning, another critical element of contingency planning for those DCOs that have been designated as systemically important by the Financial Stability Oversight Council. These plans are also considered essential information by the Federal Deposit Insurance Corporation in the development of plans for resolving a clearinghouse pursuant to Title II of the Dodd-Frank Act.

Last Updated: July 21, 2016

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