CPMI and IOSCO report highlights the need for central counterparties to have adequate resources and appropriate tools to address non-default losses

The Bank for International Settlements‘ CPMI and IOSCO have jointly released a report addressing central counterparty practices for handling NDLs. The report emphasizes the importance of CCPs having adequate resources and appropriate tools to manage NDLs.
In August 2022, CPMI and IOSCO initiated a discussion paper on central counterparty practices for NDLs entitled „Discussion paper on central counterparty practices to address non-default losses. The present report builds upon this discussion paper, providing a comprehensive overview of current CCP practices in dealing with NDLs.
The report’s objective is to share and enhance understanding of existing practices among CCPs in managing potential losses from non-default events, particularly in recovery or orderly wind-down scenarios. It does not intend to establish new standards or offer guidance on existing ones, nor does it assess current CCP practices.
The PFMI by CPMI and IOSCO already address NDLs in various contexts, such as risk management and general business risk. However, there is limited common understanding of CCPs‘ current practices for NDLs.
The report is structured into five sections. Section 1 provides background information and objectives. Section 2 delves into the analysis conducted by CCPs to develop NDL plans, including identifying scenarios, quantifying potential losses, and assessing resources and tools. Section 3 focuses on promoting the operational effectiveness of CCPs‘ NDL plans, including enforceability of tools and IT support. Section 4 discusses the review and testing of NDL plans, while Section 5 covers governance, transparency, and engagement with participants and authorities.
The report acknowledges that some practices are consistent with PFMI and CPMI-IOSCO Recovery Guidance, while others may not be explicitly outlined in these frameworks. Future work will build upon the current practices and concepts outlined in this report.