CFTC Publishes Guidance Regarding Derivatives Clearinghouse Recovery and Wind-Down Plans | Practical Law

CFTC Publishes Guidance Regarding Derivatives Clearinghouse Recovery and Wind-Down Plans | Practical Law

The CFTC has published guidance designed to help registered derivatives clearinghouses with their recovery and wind-down plans under CFTC Regulation 39.39(b).

CFTC Publishes Guidance Regarding Derivatives Clearinghouse Recovery and Wind-Down Plans

by Practical Law Finance
Published on 28 Jul 2016 • USA (National/Federal)
The CFTC has published guidance designed to help registered derivatives clearinghouses with their recovery and wind-down plans under CFTC Regulation 39.39(b).
On July 21, 2016, the CFTC issued guidance designed to help CFTC-registered derivatives clearinghouses with their recovery and wind-down plans under CFTC Regulation 39.39(b). CFTC Regulation 39.39(b) requires systemically important derivatives clearing organizations (SIDCOs) and Subpart C derivatives clearing organizations (Subpart C DCOs) (collectively, DCOs) to develop and maintain viable plans for their recovery or orderly wind-down necessitated by:
  • Uncovered credit losses or liquidity shortfalls.
  • General business risk, operational risk, or any other risk that threatens the DCO as a going concern.
The CFTC's guidance highlights certain topics that DCOs should analyze in developing their recovery and wind-down plans, including:
  • Recovery scenarios. DCOs should identify and analyze certain scenarios to be included in their recovery plans.
  • Recovery tools. For each scenario, a recovery plan should identify and analyze a variety of factors including, but not limited to:
    • the particular recovery tools such as assessments, gains-based haircutting, voluntary optional payments, partial tear-up, intercompany loan agreements, or other means of capital infusion by a parent, affiliate, or insurance that the DCO plans to use in specific scenarios;
    • the specific order in which the DCO would expect to use such tools, the event that would trigger the use of each tool in the sequence, and any discretion that the DCO has in the use and/or sequencing of the tools;
    • whether each tool is mandatory or voluntary; and
    • the specific steps that would be required to implement each tool;
  • Scenarios. Wind-down scenarios and options for an orderly wind-down.
  • Interconnections and interdependencies. Both recovery and wind-down plans should identify the financial and operational interconnections and interdependencies among the DCO and its relevant affiliates, internal and external service providers, and other relevant stakeholders, such as clearing members, in order to analyze the impact that those relationships may have on the plans.
  • Agreements. DCO must maintain a variety of contractual arrangements during ordinary operations, in times of stress and in order for the DCO to continue operations in recovery and wind-down.
  • Financial resources. Recovery and wind-down plans should include "evidence and analysis" to support the conclusion that the amount of financial resources the DCO considers necessary to implement the plans is sufficient.
  • Governance. The DCO should include in both its recovery and wind-down plans all relevant governance arrangements.
  • Notifications. Plans must include procedures for informing:
    • the CFTC when plans are initiated or pending;
    • clearing members and other stakeholders when plans are initiated or pending; and
    • the CFTC and FDIC with information necessary for resolution planning.
  • Assumptions. In cases where regulatory approvals are necessary in order to take certain actions specified in recovery or wind-down plans, DCOs must identify and follow the steps necessary to obtain approvals.
  • Updates. Plans should include procedures for evaluating and updating plans at regular intervals and at other times, when necessary.
  • Testing. Plans should include procedures for regularly testing plan viability.
The guidance also includes a list of questions for DCOs to consider when:
  • Evaluating whether particular tools for recovery and orderly wind-down should be included in recovery and wind-down plans.
  • Designing proposed rule changes to support the inclusion of particular tools included in recovery and wind-down plans.
These questions are meant to help DCOs consider various factors that play into their plans when analyzing and evaluating the feasibility and suitability of tools for inclusion in their plans. These factors should also be considered when reviewing whether the following obligations have been met:
  • DCOs must have governance arrangements that "explicitly support the stability of the broader financial system and other relevant public interest considerations of clearing members, customers of clearing members, and other relevant stakeholders."
  • The board of directors of each DCO must "make certain that the [DCO's] design, rules, overall strategy, and major decisions appropriately reflect the legitimate interests of clearing members, customers of clearing members, and other relevant stakeholders."