LEGISLATIVE TRAIN 12.2020 - 6 ECONOMIC AND MONETARY AFFAIRS - ECON - ECON ...
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LEGISLATIVE TRAIN 12.2020
6 ECONOMIC AND MONETARY AFFAIRS - ECON
RECOVERY AND RESOLUTION OF FINANCIAL INSTITUTIONS OTHER THAN BANKS /
CENTRAL COUNTERPARTIES [ ARRIVED ]
CONTENT
Expected potential gains after full phasing in of a large number of different initiatives: €63 billion
Financial institutions other than banks offer a range of essential services – including clearing and settlement, asset management,
insurance and trading of various financial instruments – which constitute vital components for the orderly functioning of the financial
system. While performing their activity, however, these institutions may face financial or operational distress, which can result in a
source of systemic risk.
For this reason, the European Commission, in a 2010 communication, promised to investigate 'what crisis management and resolution
arrangements, if any, are necessary and appropriate for (...) financial institutions' other than banks’. Following that communication,
the Commission launched a consultation on a possible framework for recovery and resolution of non-bank financial institutions in
2012.
In a 2013 own-initiative report, the European Parliament called on the Commission to prioritise the recovery and resolution of central
counterparties (CCPs) and of central securities depositories (CSDs) exposed to credit risk, and to consider whether it is appropriate to
develop similar legislation for other financial institutions in the areas of insurance, asset management and payments. The European
Parliament reiterated such a request in a 2015 resolution on building a capital markets union.
Against this background, the Commission published a proposal for a regulation on the recovery and resolution of CCPs on 28
November 2016. A CCP is a financial market infrastructure that interposes itself between the buyer and the seller (typically banks or
other financial institutions) of a security, becoming the buyer to the seller and the seller to the buyer, thereby guaranteeing the
performance of transactions. Through their activity, CCPs reduce the 'counterparty risk', which is the risk that a financial transaction is
not successful because the buyer is unable to pay the price or the seller unable to deliver the securities. CCPs manage essential risks in
financial markets, such as liquidity risk and market risk, thereby improving the overall resilience of the financial system. The scale and
importance of CCPs are set to expand with the gradual implementation of the G20 commitment to increase the transparency of
derivative contracts traded over-the-counter (OTC) by imposing an obligation to centrally clear liquid and standardized contracts via
CCPs. The European Market Infrastructures Regulation, or 'EMIR', lays down prudential requirements for CCPs, as well as
requirements regarding their operation, oversight and risk management.
1/5The proposed new EU rules require (i) CCPs to prepare recovery plans envisaging measures to be taken in the event of financial
difficulties exceeding the risk management defences under EMIR; (ii) national supervisors to review and approve these plans; (iii)
national authorities to lay down resolution plans in the event of a CCP's failure (preparation and prevention tools). The proposal also
provides national authorities with powers to step in when a CCP faces financial difficulties and to instruct a CCP to take actions in its
recovery plan or other steps (early intervention tools). Finally, it sets out resolution tools to be applied by national authorities to a
failing CCP, when it is in the public interest. Such tools include the power to sell a CCP’s entire or critical functions, to create a publicly
controlled bridge CCP and to allocate losses among owners and participants.
In April 2017, the European Securities and Markets Authority (ESMA) issued an opinion on the European Commission’s Proposal for
the EU Regulation on CCP Recovery and Resolution, proposing (i) to introduce additional requirements regarding NRAs’ recovery
plans; (ii) to consider a more effective mediation mechanism; and (iii) to consider the implications ESMA’s role has on its budget. In
July 2017, the European Systemic Risk Board (ESRB) released an opinion highlighting areas where the Commission’s proposal could be
refined so as to better address potential financial stability issues. In the following September, the European Central Bank (ECB) tabled
an opinion focused on the involvement of central banks in recovery and resolution.
At a global level, the Financial Stability Board (FSB) and the Committee on Payment Systems and Market Infrastructure together with
the International Organisation of Securities Commissions (CPMI-IOSCO) updated the global standards on financial markets
infrastructures in 2014, to enhance the CCP resilience, recovery planning and resolvability. In 2017, both these organisations consulted
further on core parts of this guidance. The G20 leaders endorsed the enhanced framework in September 2016.
The European Parliament's Committee on Economic and Monetary Affairs (ECON) appointed Kay Swinburne (ECR, United Kingdom)
and Jakob von Weizsäcker (later replaced by Babette Winter) (S&D, Germany) as co-rapporteurs for this file. The co-rapporteurs
presented their draft report on 25 September 2017. The ECON Committee adopted its final report on 24 January 2018. The proposed
amendments aim to ensure fair and collective commitment of the private sector to rescue a distressed CCP at the recovery stage, to
increased loss absorption capacity and minimise risks to taxpayers. As a general principle, recovery plans should ensure that losses are
allocated to involved stakeholders (CCP, clearing members and clients) on the basis of their level of responsibility or ability to control
risks. That would put CCPs on the first layer, clearing members on the second and clients on the third one. Recovery plans should
clearly distinguish between losses arising from a clearing member default (default losses) and losses due to other reasons (non-
default losses), such as CCP operational failures; the CCP capital would bear first losses in both cases, before any other recovery tools
can be activated. Greater consideration is given to clients, including granting that non-defaulting clearing members’ clients are
compensated if recovery was successful thanks to the application of variation margin gain haircuts to their assets. As regards
resolution, the no-creditor-worse-off (NCWO) principle is amended in order to appropriately reflect the theoretical costs of non-
intervention. In addition, the legal protection for the resolution authority is improved when it takes a decision to accelerate the move
from recovery to resolution. Finally, a review clause is included to adapt the EU CCP recovery and resolution framework to the
institutional architecture resulting from the ongoing review of EMIR and of the European supervisory authorities (ESAs) (see specific
fiches).
LEGISLATIVE TRAIN 12.2020 6 ECONOMIC AND MONETARY AFFAIRS - ECON 2/5Parliament voted on the file on 27 March 2019 to conclude in first reading and preserve its position for its next term.
The Council's Working Party on Financial Services examined the proposed Regulation in a number of meetings under various
Presidencies.
The Permanent Representatives Committee in the Council agreed on 4 December 2019 on a mandate for the Council's negotiations
with the European Parliament.
On 23 June 2020, the European Parliament and the Council Presidency reached a final compromise, which permitted the conclusion of
the negotiations.
On 2 September 2020, the Committee on Economic and Monetary Affairs (ECON) of the European Parliament approved the outcome
of the trilogue negotiations. The Chair of the ECON Committee addressed a letter to the Council Presidency the same day, indicating
that, should the Council adopt the agreed text (subject to legal-linguistic verification) as its first-reading position, she would
recommend to the Parliament's plenary session that the Parliament should in its second reading approve this Council first-reading
position.
On 12 October 2020, the Council reached a political agreement on the agreed text prior to its legal linguistic verification. Taking into
account the above agreement and after legal-linguistic revision, the Council adopted its position at first reading on 17 November 2020,
in accordance with the ordinary legislative procedure laid down in Article 294 of the Treaty on the Functioning of the European Union
(TFEU).
Parliament adopted the position in Committee on December 2. The Committee recommendation was tabled for plenary (2nd reading)
on December 3.
The final act was signed on 16 December.
References:
• EP Legislative Observatory, Procedural file on Framework for the recovery and resolution of central counterparties,
2016/0365(COD)
LEGISLATIVE TRAIN 12.2020 6 ECONOMIC AND MONETARY AFFAIRS - ECON 3/5• European Parliament Legislative Observatory, Procedure file on Initiative report Recovery and resolution framework for non-bank
institutions, 2013/2047(INI)
• European Commission, Communication on An EU Framework for Crisis Management in the Financial Sector, COM(2010)0579
• European Commission, Proposal for a Regulation of the European Parliament and of the Council on a framework for the recovery
and resolution of central counterparties and amending Regulations (EU) No 1095/2010, EU) No 648/2012, and (EU) 2015/2365,
COM(2016) 856
• European Parliament, Resolution of 9 July 2015 on Building a Capital Markets Union, 2015/2634(RSP)
Further reading:
• European Parliament, EPRS, Recovery and resolution of central counterparties (CCPs), Briefing, April 2018
• ESMA, Opinion - European Commission’s Proposal for EU Regulation on CCP Recovery and Resolution, April 2017
• European Systemic Risk Board, Opinion on a central counterparty recovery and resolution framework, July 2017
• ECB, Opinion of the European Central Bank ona proposal for a regulation of the European Parliament and of the Council on a
framework for the recovery and resolution of central counterparties and amending Regulations (EU) No 1095/2010, EU) No 648/2012,
and (EU) 2015/2365, CON/2017/38
• EESC, Opinion - Recovery and resolution of central counterparties, March 2017
For further information: Angelos Delivorias, legislative-train@europarl.europa.eu
As of 18 December 2020.
RAPPORTEUR RAPPORTEUR
Marek BELKA Kay SWINBURNE
ECON ECON
RAPPORTEUR RAPPORTEUR
Johan VAN OVERTVELDT Babette WINTER
BUDG - ECON ECON
LEGISLATIVE TRAIN 12.2020 6 ECONOMIC AND MONETARY AFFAIRS - ECON 4/5HYPERLINK REFERENCES
• http://www.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2016/0365(COD)&l=en
• http://www.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2013/2047(INI)&l=en
• http://ec.europa.eu/internal_market/bank/docs/crisis-management/framework/com2010_579_en.pdf
• http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2016:856:FIN
• http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P8-TA-2015-0268
• http://www.europarl.europa.eu/RegData/etudes/BRIE/2017/599345/EPRS_BRI(2017)599345_EN.pdf
• https://www.esma.europa.eu/sites/default/files/library/esma70-151-222_esma_opinion_on_ccp_rr_0.pdf
• http://www.esrb.europa.eu/pub/pdf/other/170725_ESRB_opinion_counterparty_recovery_resolution_framework.en.pdf
• https://www.ecb.europa.eu/ecb/legal/pdf/en_con_2017_38_eu_f_sign.pdf
• https://dm.eesc.europa.eu/EESCDocumentSearch/Pages/opinionsresults.aspx?k=(adoptiondate:2017/03/28..2017/03/30)(doss
iername:ECO OR OLD-ECO OR OLD-ECO-SOC OR OLD-REG)(rapporteur:'GARCÍA DEL RIEGO')(documentlanguage:EN)
• mailto:legislative-train@europarl.europa.eu
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