Joint statement of the Austrian Federal Ministry of Finance,
the Austrian Financial Market Authority and the Austrian Central Bank
The Austrian Federal Ministry of Finance, the Austrian Financial Market Authority and the Austrian Central Bank take the opportunity to make a statement concerning the Consultation of the European Commission on a possible recovery and resolution framework for financial institutions other than banks.
Summary
CCPs/CSDs
- In general recovery and resolution provisions should apply to all CCPs and CSDs, since market infrastructure could be considered as potentially systemically important. However, when applyingresolution tools, the systemic relevance (size, interconnectedness and substitutability) of an FMI should be taken into account.
- For systemically important CCPs and CSDs the focus should lie on the transferability of services and the time period needed to continue or transfer operations. For non-systemically important CCPs and CSDs a close down might be an option in cases where market disruptions can be avoided.
- We would prefer to incorporate the relevant recovery and resolution provisionsin the existing/proposed legal texts reflecting any particularities of the different types of FMIs, instead of adding an additional legal act dealing with all types of FMIs.
- We fully agree with the objectives, powers and toolsproposed in the consultation paper. Recovery and resolution plans should be drafted by FMIs and reviewed by the competent authorities.
Insurance and reinsurance firms
- The existing tools are appropriate and sufficient. There is no further need for harmonization at EU level. Intervention is already outlined in the current Solvency I as well as in the proposed Solvency II framework. However, recovery and resolution plans as living documents could be possible new measures if there is a clear evidence for an added value.
- The focus should primarily be on identifying systemically important insurers and the activities in insurance which have the potential to generate systemic risk.
Payment systems and other nonbank financial institutions/entities
- Recovery or resolution agreements have to be limited to systemically important payments systems (SIPS).Recovery plans seem a reasonable instrument. Regarding resolution plans we would advice against a legal requirement for non-SIPS or Electronic Money Institutions. In addition a possible waiver used by the competent authority would be sensible.
- Other entities should be subject to a resolution framework only if covered by prudential supervision. Resolution regimes constitute instruments of last resort of prudential regimes and cannot be extended to entities that are not supervised or that run business models with unregulated risk taking, such as hedge funds.
I.Financial market infrastructures: Central Counterparties (CCPs) and Central Securities Depositories (CSDs)
General
1. Do you think that a framework of measures and powers for authorities to resolve CCPs and CSDs is needed at EU level or do you consider that ordinary insolvency law is sufficient?
FMA and OeNB welcome the proposal of the commission for a framework of measures and powers for authorities to resolve CCPs and CSDs and the intention to establish uniform rules in the EU. Since in Austria there only exists one CCP and one CSD a continuity framework on both types of FMIs is of crucial importance for financial market stability. We consider that ordinary insolvency procedures might be insufficient, in particular when dealing with systemically important CCPs and CSDs.
From our point of view the key elements of a recovery and resolution framework are to some extent included in the current legal texts (EMIR Art 34) and proposals (CSDR: Art 18, 42, 44), whereby the details are not sufficiently developed so far. We would prefer to incorporate the relevant recovery and resolution provisionsin the existing/proposed legal texts reflecting any particularities of the different types of FMIs, instead of adding an additional legal act dealing with all types of FMIs.
2. In your view, which scenarios/events might lead to the need to resolve respectively a CCP and a CSD? Which types of scenarios CCPs/CSDs and authorities need to be prepared for which may imply the need for recovery actions if not yet resolution?
Both CCPs and CSDs are exposed to operational risk, which potentially may lead to the need of recovery actions. Possible scenarios therefore may include serious technical malfunctions stemming from system failures, human error and external events.
CCPs guarantee the performance of open transactions and therefore face credit and liquidity risk. Scenarios consequently must include the failure of more than the two clearing members to with the CCP has the largest exposure.
If an exogenous shock affects a banking undertaking, the shock could consequently be transmitted to other entities. Potential contagion channels may lie for instance in the funding and asset markets. The CCP thus must be able to withstand the simultaneous failure of several counterparties. A serious exogenous shock leading to the default of several trading partners of a CCP may be the default of a major issuing entity of debt/equity securities (e.g. a sovereign default). Moreover, in such an instance the CCP may have additional exposure against the defaulting entities via its investment portfolio.
Furthermore, in crisis periods CCPs may not be able to liquidate collateral or positions of defaulters due to disorderly market conditions and thus may be exposed to liquidity and market risk. Therefore scenarios may stress the combined effect of defaulting market participants and increased liquidity requirements for the CCP due to difficulties to dispose assets.
Concerning their core functions, CSDs are mainly exposed to operational and legal risks. However, depending on the results of the negotiations concerning Art.52 CSDR, if CSDs do provide intraday credit to their participants, credit and liquidity risk might become relevant as well. Scenarios in this regard could be similar as for CCPs and should include the default of several counterparties combined with increased liquidity and market risk due to disorderly market conditions.
Finally, it should be acknowledged that FMIs may be interlinked, either directly through transactions, or via common transaction partners. Scenarios therefore should consider the potential dangers of contagion effects between FMIs.
3. Do you think that existing rules which may impact CCPs/CSDs resolution (such as provisions on collateral or settlement finality) should be amended to facilitate the implementation of a resolution regime for CCPs/CSDs?
At the moment there is no national provision on collateral for the Austrian CCP and CSD. In our view amendments of existing settlement finality rules may cause uncertainty among market participants, especially when it happens during a crisis situation. However, the possibility to impose a moratorium and to ensure that the application of a recovery/resolution tool does not count as a defaultevent could be useful.
4. Do you consider that a common resolution framework applicable to CCPs and CSDs is desirable or do you favor specific regimes by type of FMIs?
Separate provisions for CCPs and CSDs would be desirable, as the specific characteristics of the main risks as well as the institutional setting are different. For ease of reference, it could be useful to include necessary provisions in the existing/proposed legal acts. As mentioned above EMIR and CSDR already address recovery and resolution issues.
5. Do you consider that it should only apply to those FMIs which attain specific thresholds in terms of size, level of interconnectedness and/or degree of substitutability, or to those FMIs that incur particular risks, such as credit and liquidity risks, or that it should apply to all? If the former, what are suitable thresholds in one or more of these respects beyond which FMIs are relevant from a resolution point of view? What would be an appropriate treatment of CSDs that do not incur credit and liquidity risks and those that incur such risks?
In general recovery and resolution provisions should apply to all CCPs and CSDs, since they all could be considered as potentially systemically important. However, when applyingresolution tools, the systemic relevance (size, interconnectedness and substitutability) of an FMI should be considered in every single case. In order to determine the systemic importance, authorities should also consider possible consequences of an orderly wind down.
For systemically important CCPs and CSDs the focus should lie on the transferability of services and the time period needed to continue or transfer operations. Thus an asset separation or bridge bank tool might be useful. For non-systemically important CCPs and CSDs a close down might be an option in cases where market disruptions can be avoided (allowing contracts to expire and without concluding new ones). In such a case it needs to be ensured that expenses arising during the liquidation period are covered by shareholders; and that participants of the failing FMI have continuously access through an alternative FMI.
6. Regarding FMIs (some CSDs and some CCPs) that are also credit institutions is the proposed bank recovery and resolution framework sufficient or should something in addition be considered? If so, what should the FMI-specific framework add to the bank recovery and resolution framework? How do you see the interaction between the resolution regime for banks and a specific regime for CCPs/CSDs?
The Austrian CCP does not have a banking license. Regarding CSDs it would be interesting to have a close look on the final outcome of the CSD Regulation whether a combination of CSD and banking activities will be allowed. Where FMIs have banking license the bank recovery and resolution framework should apply and be supplemented accordingly to consider the specifics of FMI services. The FMI function should be highlighted within recovery/resolution plans, any internal (within a group or with other business areas) and external (with other FMIs) interlinkages should be determined and its transferability and separability exactly assessed. Regarding the interaction, we expect that resolution regimes for banks will strengthen FMIs as well, since FMIs and their stability largely depend on the solvency of their participants.
Objectives
7. Do you agree that the general objective for the resolution of CCPs/CSDs should be continuity of critical services?
Yes, for reasons already mentioned above, we agree that the general objective for the resolution of CCPs and CSDs should be continuity of critical services.
8. Do you agree with the above objectives for the resolution of CCPs/CSDs?
Yes, we agree with the objectives mentioned in the consultation paper.
9. Which ones are, according to you, the ones that should be prioritized?
We consider the continuity of critical services of FMIs as the most important objective. However, all other objectives should be considered as well.
10. What other objectives are important for CCP/CSD resolution?
The operational objectives could be complemented by the need to provide appropriate safeguards to property rights (partial property transfer or compensation) and reflect the “no creditor worse off than in insolvency” principle, in order to ensure that creditors will not be discriminated.
Recovery and resolution plans (RRPs)
11. What should be the respective roles of FMIs and authorities in the development and execution of recovery plans and resolution plans? Should resolution authorities have the power to request changes in the operation of FMIs in order to ensure resolvability?
We fully support the approach that FMIs draft recovery and resolution plans. Though, competent authorities should review the plans and need the power to require any amendments and to apply the measures mentioned within these plans[1].
12. To what extent do you think that CCPs/CSDs in cooperation with their users would be able to define efficient recovery and resolution plans on the basis of amendments to their contractual laws?
Regarding the ability to define efficient recovery and resolution plans there should not be a difference between banks on the one hand, and CCPs/CSDs in cooperation with their users on the other hand. The involvement of users would be very useful, since the users take part in the waterfall procedure and would mainly benefit from efficient plans. However, recovery and resolution plans have to be accorded with competent authorities, since both CCPs/CSDs and their users may have the incentive to rely on taxpayers money due to moral hazard.
Resolution triggers
13. Should resolution be triggered when an FMI has reached a point of distress such that there are no realistic prospects of recovery over an appropriate timeframe, when all other intervention measures have been exhausted, and when winding up the institution under normal insolvency proceedings would risk causing financial instability?
As suited, resolution triggers should be equivalent to those of banks, taking into account the particularities of FMIs. Authorities should have the flexibility to decide about resolution or normal insolvency proceedings on a case by case basis and to apply one or more of the resolution tools as needed. In general, resolution should be triggered if it is in the public interest to avoid insolvency.
14. Should these conditions be refined for FMIs? For example, what would be suitable indicators that could be used for triggering resolution of different FMIs? How would these differ between FMIs?
See 13 above. Regarding the indicators for triggering we generally do not see a need to deviate from the indicators used within the planned bank recovery and resolution framework.
15. Should there be a framework for authorities to intervene before an FMI meets the conditions for resolution when they could for example amend contractual arrangements and impose additional steps, for example require unactivated parts of recovery plans or contractual loss sharing arrangements to be put into action?
From our point of view such a framework to intervene is already foreseen in current/proposed legal texts and will be useful to prevent a resolution/insolvency.
Resolution powers
16. Should resolution authorities of FMIs have the above powers? Should they have further powers to successfully carry out resolution in relation to FMIs? Which ones?
We agree with the proposed powers. Resolution plans should help to implement these powers.
17. Should they be further adapted or specified to the needs of FMI resolution?
We do not see a need to further adapt these powers.
18. Do you consider that temporary stay on the exercise of early termination rights could be a relevant tool for FMIs? Under what conditions? How should it apply between interoperated FMIs? How should it be articulated with similar powers to impose temporary stays in the bank resolution framework?
A temporary stay could be useful to ensure the transfer of services to another FMI. Since early termination rights are used by market participants as a risk mitigation tool, the temporary stay should be as short as possible and in line with the bank recovery and resolution framework to preserve the effectiveness of this tool.
19. Do you consider that moratorium on payments could be a relevant tool for all FMIs or only some of them? If so, under what conditions?
In general, a moratorium on payments could be an efficient instrument to gain enough time for FMIs to realize given collateral. A moratorium on payments could be relevant for all FMIs delivering payment flows, including CCPs and CSDs.
Resolution tools
20. Which reorganisation tools could be appropriate for resolving different types and CSDs and CCPs? What would be their advantages and disadvantages?
All three proposed resolution tools would be appropriate in principle. However, because of operational constraints (i.e. establishing new account connections and IT solutions with the new market player), the option of transferring all or parts of operations to an alternative healthy market player could turn out to be difficult in practice. Therefore, it should be considered to ask FMIs to set up the organizational and technical infrastructure required for a transfer of operations ex-ante. Such preparations would directly address moral hazard, impose self discipline and enable a swift substitution of operations by another FMI in case of a crisis. Obviously, in case of cross border transfers, legal uncertainties have to be considered. The second and third proposals could turn out to be costly for taxpayers ("bad FMI" like bad banks).
21. Which loss allocation and recapitalisation tools could be appropriate for resolving different types of CSDs and CCPs? Would this vary according to different types of possible failures (e.g. those caused by defaulting members, or those caused by operational risks)? What would be their advantages and disadvantages?
Regarding CCPs there are already sufficient rules in context with collateral, margin calls and resolution funds under EMIR. For CSDs similar solutions should be proposed. Converting a CCPs debt to equity (contingent debt instruments) may improve the solvency position of the CCP, however, it will not necessarily improve the CCPs liquidity or general trust of market participants. During disorderly markets the liquidation of collateral may become difficult and constrain the liquidity of FMIs.
22. What other tools would be effective in a CCP/CSD resolution?
We do not see a need for other tools.
23. Can resolution tools based on contractual arrangements be effective and compatible with existing national insolvency laws?
According to Austrian law, the trustee in bankruptcy has the right to choose if he wants to fulfil or rescind a contract that has been concluded before an entity became insolvent. Therefore contractual arrangements might not be sufficient to ensure an orderly wind down of an FMI once an insolvency proceeding has been initiated. Group resolution
24. Do you consider that a resolution regime for FMIs should be applicable to the whole group the FMI is a part of? What specific tools or powers for the resolution authorities should be designed?
A resolution regime for FMIs should only be applicable for the FMI itself.
Cross border resolution
25. In your view, what are the key elements and main challenges to take into account for the smooth resolution of an FMI operating cross-border? What aspects and effects of any divergent insolvency and resolution laws applicable to FMIs and their members are relevant here? Are particular measures needed in the case of interoperable CCPs or CSDs?