Central Counterparty Resolution refers to the structured process for managing the failure of a Central Counterparty (CCP), designed to maintain financial market stability and minimize disruption to clearing and settlement operations. This framework addresses the systemic risk posed by a CCP’s insolvency.
Mechanism
This process typically employs a hierarchy of financial resources, including the CCP’s own capital, participant contributions, and default funds, to absorb losses and ensure continued market function. It often incorporates mechanisms for porting client positions to solvent members or orderly liquidation of defaulting member portfolios.
Methodology
Regulatory bodies establish detailed rules and powers for resolution authorities to intervene, recapitalize, or reorganize a failing CCP. The objective is to prevent contagion across the financial system and preserve the critical market services provided by the CCP, thereby safeguarding overall market integrity.
A CCP's legal framework codifies the precise sequence of loss allocation, transforming a failed auction from a crisis into a controlled recovery process.
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