How FI will continue to handle the event where a member was declared in default on the commodity market

FI is continuing to analyse the event that occurred in September 2018 when a member on the commodity market was declared in default. We describe here several of the issues that FI is currently analysing. We are also publishing a discussion paper that FI wrote to contribute to an ongoing international discussion on auctions as a method to manage a default in a central counterparty.

It is very unusual – even from an international perspective – for a clearing house to suffer losses to such a degree that the other members' contributions to the default fund are needed to cover these losses. The course of events from the past autumn has therefore raised considerable interest from authorities and organisations in other countries. Below are some of the issues that FI is currently analysing.

Recovery and resolution of central counterparties

Central counterparties play a large and growing role in the financial infrastructure. Financial and operational problems at a central counterparty or its participants could spread quickly to other firms and thus have serious implications for financial stability.

Systemically important banks must have recovery plans and the possibility of resolution in the event the bank suffers major financial problems. There are at this time no similar legislative requirements on central counterparties at either the EU level or in Sweden.

However, a proposal from the European Commission for recovery and resolution regulations for central counterparties is currently being negotiated within the EU. FI is carefully following this work and continuing to promote the development of a European framework for recovery and resolution, for example within the European Securities and Markets Authority (ESMA).

A resolution framework would increase the possibilities for a central counterparty to continue to offer critical services – services that are necessary for the markets to function well – even if it suffers serious financial problems.

Auction proceedings

Methods for managing defaults in a central counterparty are being discussed internationally now, for example within the International Organisation of Securities Commissions (IOSCO). Auction proceedings have been specifically highlighted here. When a clearing member has been declared in default, a central counterparty strives to return to a matched book as quickly as possible without incurring extra costs for its members. Auctions are one method for achieving this goal.

FI has written a discussion paper on this topic to contribute to the international discussion and development moving forward.