On July 31, 2012, the Committee on Payment and Settlement Systems (CPSS) and IOSCO published a report suggesting that derivative traders, creditors and counterparties may all have to share in any losses arising from the collapse of a derivatives clearinghouse. The consultative report on the recovery and resolution of financial market infrastructures (FMIs), which include central counterparties such as derivatives clearinghouses, recommends global recovery and resolution regimes aimed at preventing derivatives clearinghouses from becoming too big to fail in light of the G-20 commitment and Dodd-Frank requirements that all swaps be cleared through clearinghouses wherever possible.

The report was issued in response to the finalized CPSS-IOSCO principles for FMIs and the Financial Stability Board's (FSB) key attributes of effective resolution regimes for financial institutions, including FMIs (see Legal Updates, CPSS-IOSCO Principles for Financial Market Infrastructures and FSB Issues International Standard for Resolution Regimes). The report outlines the features of an effective recovery and resolution regime for FMIs that would not cause systemic disruption or expose taxpayers to loss. It seeks comment on the alternative ways that these key features may be applied to FMIs. The report is not intended, however, to provide a comprehensive analysis or solution to all the issues surrounding the recovery and resolution of FMIs.

The report suggests that clearinghouses submit "living wills" to regulators, similar to those required by banks (see Practice Note, Living Will Requirements for Financial Institutions). One of the proposed resolution regimes would require loss allocation to be assessed through haircutting of margin and enforcing outstanding obligations to replenish default funds. However, because this might itself have a destabilizing effect on the market during a crisis when access to credit markets and liquidity are limited, the losses may ultimately be shared by creditors, counterparties and derivative traders.

The CPSS and IOSCO request comments on the consultative report by September 28, 2012, focusing on, among other things, the issues or circumstances that need to be taken into account in developing recovery and resolution strategies for FMIs.

For more on swap margin collateral requirements, see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules.