# How Do Resolution Authorities Prioritize Critical Functions during a Ccp Failure? ▴ Question

**Published:** 2025-08-05
**Categories:** Question

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## Concept

The failure of a [central counterparty](https://prime.greeks.live/area/central-counterparty/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (CCP) represents a systemic event of the highest magnitude, capable of propagating stress across the entire financial architecture. Consequently, [resolution authorities](https://prime.greeks.live/question/what-are-the-key-differences-between-the-resolution-of-a-bank-and-the-resolution-of-a-ccp/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) are endowed with specific powers to intervene when a CCP’s own recovery mechanisms are insufficient or their use would destabilize the market. The core objective of this intervention is the preservation of financial stability. This is achieved by ensuring the continuity of the CCP’s critical functions, those activities so vital to the market that their sudden cessation would trigger widespread economic disruption.

Identifying these [critical functions](https://prime.greeks.live/area/critical-functions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is the foundational step in any resolution plan. The analysis hinges on factors like the CCP’s market share, its interconnectedness with other financial institutions, and the availability of substitutes for its services. A function is deemed critical if its disruption would have a significant adverse impact on the [financial system](https://prime.greeks.live/area/financial-system/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) or the real economy. This evaluation is not static; it is a dynamic assessment that must consider the prevailing market conditions at the time of the crisis.

> A resolution authority’s primary goal during a CCP failure is to maintain financial stability by ensuring the continuity of critical functions.

The prioritization of these functions is a complex process, guided by a set of internationally agreed-upon principles. The [Financial Stability](https://prime.greeks.live/area/financial-stability/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Board (FSB) has been instrumental in developing a framework that emphasizes the need for resolution authorities to have a clear strategy and a range of tools at their disposal. This framework recognizes that a one-size-fits-all approach is unworkable given the diversity of CCPs and the markets they serve. Therefore, resolution plans are tailored to the specific circumstances of each CCP, taking into account its unique structure, the products it clears, and its operational dependencies.

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## Strategy

The strategic approach to prioritizing critical functions during a [CCP failure](https://prime.greeks.live/area/ccp-failure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is multifaceted, involving a pre-planned yet flexible framework. Resolution authorities do not improvise during a crisis; they execute a meticulously crafted resolution plan. This plan is the culmination of extensive analysis and collaboration between the home [resolution authority](https://prime.greeks.live/area/resolution-authority/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), relevant foreign authorities, and the CCP itself.

A key component of this strategy is the establishment of cross-border Crisis Management Groups (CMGs) for CCPs that are systemically important in multiple jurisdictions. These groups ensure a coordinated response, mitigating the risk of conflicting actions that could exacerbate the crisis.

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## The Resolution Toolkit

Resolution authorities are equipped with a range of tools to manage a CCP failure. The choice of tools depends on the specific nature of the crisis and the objectives of the resolution. Some of the primary tools include:

- **Transfer of assets to a third party** ▴ This involves transferring the critical functions of the failing CCP to a healthy institution or a specially created “[bridge CCP](https://prime.greeks.live/area/bridge-ccp/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” This allows for the seamless continuation of clearing services, minimizing disruption to the market.

- **[Bail-in](https://prime.greeks.live/area/bail-in/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** ▴ This tool allows the resolution authority to write down or convert to equity the claims of the CCP’s creditors. This helps to absorb losses and recapitalize the CCP, enabling it to continue its critical operations. Shareholders are the first to bear losses, followed by creditors.

- **Temporary stay on termination rights** ▴ Resolution authorities can temporarily prevent counterparties from terminating their contracts with the failing CCP. This provides a crucial window of time to implement other resolution measures without a disorderly unwinding of positions.

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## What Are the Key Considerations in Prioritizing Functions?

The prioritization of critical functions is guided by a set of core principles:

- **Maintaining Financial Stability** ▴ The overarching objective is to prevent the CCP’s failure from triggering a broader financial crisis. Functions that are essential for the stability of the wider financial system will be given the highest priority.

- **Protecting Public Funds** ▴ Resolution strategies are designed to avoid the use of taxpayer money. The “bail-in” mechanism, which imposes losses on shareholders and creditors, is a key tool in this regard.

- **Ensuring Continuity of Services** ▴ The goal is to ensure that the critical clearing and settlement services provided by the CCP continue to operate smoothly. This may involve transferring these services to another entity or recapitalizing the existing CCP.

> The selection of resolution tools is tailored to the specific circumstances of the CCP failure, with the primary aim of preserving market stability.

The following table illustrates the potential impact of different CCP failure scenarios and the corresponding strategic priorities for resolution authorities:

### CCP Failure Scenarios and Resolution Priorities

| Failure Scenario | Primary Impact | Strategic Priority | Key Resolution Tools |
| --- | --- | --- | --- |
| Default of a major clearing member | Credit losses exceeding the CCP’s pre-funded resources | Loss allocation and recapitalization | Bail-in, cash calls on surviving members |
| Operational failure (e.g. cyber-attack) | Disruption to clearing and settlement services | Restoration of services and operational resilience | Transfer to a bridge CCP, temporary stay |
| Liquidity shortfall | Inability to meet payment obligations | Provision of temporary liquidity | Access to central bank liquidity facilities |

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## Execution

The execution phase of a [CCP resolution](https://prime.greeks.live/area/ccp-resolution/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) plan is a highly dynamic and intensive process. It begins when the resolution authority determines that the CCP’s own recovery plan is insufficient or that its implementation would endanger financial stability. At this point, the resolution authority takes control of the CCP and begins to implement the pre-agreed resolution strategy. This involves a rapid assessment of the situation, a decisive application of [resolution tools](https://prime.greeks.live/question/what-are-the-key-differences-between-the-resolution-of-a-bank-and-the-resolution-of-a-ccp/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), and clear communication with all stakeholders, including clearing members, other financial market infrastructures, and the public.

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## The Operational Playbook

The operational playbook for a CCP resolution can be broken down into several key stages:

- **Stabilization** ▴ The immediate priority is to stabilize the CCP and prevent a disorderly unwinding of its positions. This may involve the use of a temporary stay on termination rights and the provision of emergency liquidity.

- **Valuation** ▴ A comprehensive valuation of the CCP’s assets and liabilities is conducted to determine the extent of the losses and the resources required for resolution. This valuation is crucial for the fair application of [loss allocation](https://prime.greeks.live/area/loss-allocation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) tools like bail-in.

- **Implementation of Resolution Tools** ▴ The chosen resolution tools are then implemented. This could involve the transfer of the CCP’s critical functions to a bridge institution, the execution of a bail-in to recapitalize the CCP, or a combination of different measures.

- **Restoration of Viability** ▴ The ultimate goal is to restore the CCP to a viable and sustainable footing, or to wind down its non-critical functions in an orderly manner. This may involve a sale of the recapitalized CCP to a private sector buyer or its continued operation as a bridge institution until a permanent solution can be found.

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## How Do Authorities Ensure a Coordinated Response?

Effective coordination among different authorities is paramount for a successful CCP resolution, especially for CCPs that operate across multiple jurisdictions. This coordination is facilitated by the CMGs, which bring together the relevant home and host authorities. The CMGs are responsible for developing the resolution plan, conducting resolvability assessments, and coordinating actions during a crisis. This collaborative approach helps to ensure that the resolution strategy is coherent and that it takes into account the potential cross-border effects of any actions taken.

> A successful CCP resolution hinges on a well-defined operational playbook and seamless coordination among all relevant authorities.

The following table provides a more detailed look at the roles and responsibilities of different actors during a CCP resolution:

### Roles and Responsibilities in CCP Resolution

| Actor | Role and Responsibilities |
| --- | --- |
| Resolution Authority | Leads the resolution process, takes control of the failing CCP, and implements the resolution plan. |
| Crisis Management Group (CMG) | Coordinates the resolution of cross-border CCPs, ensuring a coherent and effective response. |
| Central Bank | Provides emergency liquidity to the CCP, subject to appropriate safeguards. |
| Clearing Members | May be subject to loss allocation measures, such as cash calls or variation margin haircutting. |
| Shareholders and Creditors | Bear losses in accordance with the bail-in hierarchy. |

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## References

- Wendt, Froukelien. “Central Counterparties ▴ Addressing their Too Important to Fail Nature.” DNB Occasional Studies, 2015.

- “Resilience, Recovery, Resolution.” CCP Global, The Global Association of Central Counterparties.

- Haene, Philip, and Greet T’Joens. “CCP recovery and resolution ▴ preventing a financial catastrophe.” NBB Economic Review, 2018.

- “Essential Aspects of CCP Resolution Planning.” Financial Stability Board, 2016.

- “Recovery and resolution of central counterparties (CCPs).” European Commission.

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## Reflection

The frameworks for CCP resolution represent a significant advancement in the management of [systemic risk](https://prime.greeks.live/area/systemic-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). They provide a structured and pre-planned approach to a crisis that could otherwise have devastating consequences for the global financial system. However, the successful execution of these plans in a real-world crisis remains a significant challenge.

The interconnectedness of the modern financial system means that the failure of a major CCP would be an event of unprecedented complexity. The effectiveness of the resolution tools and the coordination mechanisms that have been put in place will only truly be tested in the heat of such a crisis.

As market participants, it is essential to understand the principles and processes that underpin CCP resolution. This knowledge is not merely academic; it is a critical component of effective risk management. By understanding how resolution authorities are likely to act in a crisis, we can better anticipate the potential impacts on our own institutions and take steps to mitigate them. The resilience of the financial system as a whole depends on the preparedness of each of its individual components.

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## Glossary

<a href="https://prime.greeks.live/question/what-are-the-key-differences-between-the-resolution-of-a-bank-and-the-resolution-of-a-ccp/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Resolution Authorities

Bank resolution restructures a failed institution's balance sheet via bail-in; CCP resolution mutualizes member losses to preserve market function. </a><a href="https://prime.greeks.live/area/central-counterparty/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Central Counterparty

Meaning ▴ A Central Counterparty, or CCP, functions as an intermediary in financial transactions, positioning itself between original counterparties to assume credit risk. </a><a href="https://prime.greeks.live/area/critical-functions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Critical Functions

Meaning ▴ Critical Functions define the essential operational and computational processes within an institutional digital asset derivatives framework, whose continuous and precise execution is non-negotiable for maintaining market integrity and ensuring operational solvency. </a><a href="https://prime.greeks.live/area/financial-system/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Financial System

Meaning ▴ The Financial System constitutes the foundational operating system for global capital, representing the interconnected framework of institutions, markets, and infrastructure that facilitates the allocation of capital, the management of risk, and the execution of economic transactions across diverse asset classes, including institutional digital asset derivatives. </a><a href="https://prime.greeks.live/area/financial-stability/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Financial Stability

Meaning ▴ Financial Stability denotes a state where the financial system effectively facilitates the allocation of resources, absorbs economic shocks, and maintains continuous, predictable operations without significant disruptions that could impede real economic activity. </a><a href="https://prime.greeks.live/area/resolution-authority/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Resolution Authority

Meaning ▴ Resolution Authority defines the legal and operational framework empowering designated regulatory bodies to intervene in the failure of a systemically important financial institution, including those within the institutional digital asset derivatives landscape. </a><a href="https://prime.greeks.live/area/ccp-failure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Ccp Failure

Meaning ▴ A central counterparty (CCP) failure denotes the inability of a clearing house to meet its financial obligations to its clearing members, typically arising from the default of one or more large members whose losses exceed the CCP's pre-funded resources and default waterfall. </a><a href="https://prime.greeks.live/area/bridge-ccp/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Bridge Ccp

Meaning ▴ A Bridge CCP constitutes a specialized clearing mechanism designed to facilitate seamless interoperability and capital efficiency across distinct clearing ecosystems, specifically connecting traditional financial market infrastructure with digital asset derivative venues. </a><a href="https://prime.greeks.live/area/bail-in/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Bail-In

Meaning ▴ A bail-in represents a resolution mechanism designed to recapitalize a failing financial institution by imposing losses on its creditors and shareholders, thereby internalizing the cost of failure within the private sector. </a><a href="https://prime.greeks.live/question/what-are-the-key-differences-between-the-resolution-of-a-bank-and-the-resolution-of-a-ccp/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Resolution Tools

Bank resolution restructures a failed institution's balance sheet via bail-in; CCP resolution mutualizes member losses to preserve market function. </a><a href="https://prime.greeks.live/area/ccp-resolution/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Ccp Resolution

Meaning ▴ CCP Resolution defines the structured process for managing the failure of a Central Counterparty, a critical financial market utility, to ensure the continuity of essential clearing services and maintain overall financial stability. </a><a href="https://prime.greeks.live/area/loss-allocation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Loss Allocation

Meaning ▴ Loss allocation defines the predetermined methodology and operational framework for distributing financial deficits among designated participants or accounts within a structured system, typically following a credit event, default, or a realized market loss. </a><a href="https://prime.greeks.live/area/systemic-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Systemic Risk

Meaning ▴ Systemic risk denotes the potential for a localized failure within a financial system to propagate and trigger a cascade of subsequent failures across interconnected entities, leading to the collapse of the entire system. </a>

**Tags:** [Cross-Border Resolution](https://options.greeks.live/area/cross-border-resolution/), [Financial System](https://options.greeks.live/area/financial-system/), [Critical Functions](https://options.greeks.live/area/critical-functions/), [Bridge CCP](https://options.greeks.live/area/bridge-ccp/), [CCP Resolution](https://options.greeks.live/area/ccp-resolution/), [Recovery and Resolution](https://options.greeks.live/area/recovery-and-resolution/)	

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### [How Do Regulators Assess the Credibility of a Bank’s Recovery and Resolution Plan?](https://options.greeks.live/question/how-do-regulators-assess-the-credibility-of-a-banks-recovery-and-resolution-plan/)
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Regulators assess a bank's recovery and resolution plan by stress-testing its financial and operational architecture for orderly failure.

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CCP skin-in-the-game aligns the clearinghouse's incentives with members, ensuring robust risk management through shared financial exposure.

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A CCP's default waterfall is a pre-defined sequence for allocating losses, ensuring a contained and orderly resolution to a member failure.

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A central counterparty failure triggers systemic collapse by freezing liquidity, shattering trust, and transforming a core risk mitigator into a primary contagion vector.

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A CCP's default waterfall is a pre-defined protocol that sequentially allocates losses from a failed member against tiered financial defenses.

- 
### [What Are the Primary Differences between a CCP Default and a Major Bank Failure?](https://options.greeks.live/question/what-are-the-primary-differences-between-a-ccp-default-and-a-major-bank-failure/)
![A central metallic RFQ engine anchors radiating segmented panels, symbolizing diverse liquidity pools and market segments. Varying shades denote distinct execution venues within the complex market microstructure, facilitating price discovery for institutional digital asset derivatives with minimal slippage and latency via high-fidelity execution.](https://options.greeks.live/wp-content/uploads/2025/07/principals-digital-asset-derivatives-rfq-protocol-execution-nexus.jpg)

A CCP failure is a contractual collapse of a risk mutualization system; a bank failure is a solvency crisis radiating through the economy.

- 
### [How Does the EU’s Bank Recovery and Resolution Directive Affect Close-Out Netting Rights?](https://options.greeks.live/question/how-does-the-eus-bank-recovery-and-resolution-directive-affect-close-out-netting-rights/)
![A precise mechanical instrument with intersecting transparent and opaque hands, representing the intricate market microstructure of institutional digital asset derivatives. This visual metaphor highlights dynamic price discovery and bid-ask spread dynamics within RFQ protocols, emphasizing high-fidelity execution and latent liquidity through a robust Prime RFQ for atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineering-driving-institutional-digital-asset-derivatives-execution-across-advanced-rfq-protocols-and-prime-brokerage-frameworks.jpg)

The EU's BRRD subordinates close-out netting to a systemic stability protocol, imposing a temporary stay on termination rights.

- 
### [Could the Failure of a Central Counterparty Trigger a Wider Systemic Financial Crisis?](https://options.greeks.live/question/could-the-failure-of-a-central-counterparty-trigger-a-wider-systemic-financial-crisis/)
![A sleek, futuristic object with a glowing line and intricate metallic core, symbolizing a Prime RFQ for institutional digital asset derivatives. It represents a sophisticated RFQ protocol engine enabling high-fidelity execution, liquidity aggregation, atomic settlement, and capital efficiency for multi-leg spreads.](https://options.greeks.live/wp-content/uploads/2025/07/advanced-institutional-digital-asset-derivatives-rfq-protocol-execution-engine-for-optimal-liquidity-aggregation-and-atomic-settlement.jpg)

The failure of a central counterparty transforms it from a risk mitigator into a systemic contagion engine.

- 
### [How Can Regulators Enhance Stress Testing for Interconnected Central Counterparties?](https://options.greeks.live/question/how-can-regulators-enhance-stress-testing-for-interconnected-central-counterparties/)
![A sleek, metallic, X-shaped object with a central circular core floats above mountains at dusk. It signifies an institutional-grade Prime RFQ for digital asset derivatives, enabling high-fidelity execution via RFQ protocols, optimizing price discovery and capital efficiency across dark pools for best execution.](https://options.greeks.live/wp-content/uploads/2025/07/advanced-principal-rfq-protocol-architecture-for-institutional-digital-asset-derivatives-optimal-price-discovery-and-execution.jpg)

Enhancing CCP stress tests requires a regulatory shift from isolated analysis to system-wide simulations that model contagion through interconnected financial networks.

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---

**Original URL:** https://options.greeks.live/question/how-do-resolution-authorities-prioritize-critical-functions-during-a-ccp-failure/
