IOSCO and CPMI Highlight CCP Practices on Non-Default Losses

IOSCO and the Bank for International Settlements’ Committee on Payments and Market Infrastructures ("CPMI") reviewed current practices used by central counterparties ("CCPs") to address potential non-default loss events ("NDLs") (i.e., losses to a CCP that result from an event other than the failure of a clearing member).

In its report, IOSCO and CPMI encouraged further dialogue on non-default events, particularly in the context of recovery or orderly wind-downs. IOSCO and CPMI noted that the "Principles for financial market infrastructure" addresses NDLs in various circumstances, but said there is "limited common understanding of CCPs' current practices to address NDLs."

The paper described concepts and processes used by CCPs, including:

• methodologies for identifying scenarios where an NDL may occur, the ramifications of the NDL, and the adequacy of a CCP’s resources and tools to address the NDL;
• the "operational effectiveness" of a CCP’s plan to address an NDL, including reviewing, exercising and testing such plans; and
• governance and transparency regarding a CCP’s plan to address an NDL, both before and during the NDL.