Regulation (EU) 2021/23 of the European Parliament and of the Council of 16 December 2020 on a framework for the recovery and resolution of central counterparties and amending Regulations (EU) No 1095/2010, (EU) No 648/2012, (EU) No 600/2014, (EU) No 806/2014 and (EU) 2015/2365 and Directives 2002/47/EC, 2004/25/EC, 2007/36/EC, 2014/59/EU and (EU) 2017/1132 (Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national Parliaments,

Having regard to the opinion of the European Economic and Social Committee (1),

Having regard to the opinion of the European Central Bank (2),

Acting in accordance with the ordinary legislative procedure (3),

Whereas:

(1) Financial markets are pivotal for the functioning of modern economies. The more integrated they are, the greater the potential for efficient allocation of economic resources will be, potentially benefitting economic performance. However, in order to improve the functioning of the single market in financial services, it is important to have procedures in place to deal with effects of market turmoil and to ensure that if a financial institution or a financial market infrastructure that is active in this market faces financial distress or is at the point of failure, such an event does not de-stabilise the entire financial market and damage growth across the wider economy.

(2) Central counterparties (CCPs) are key components of global financial markets, stepping in between participants to act as the buyer to every seller and the seller to every buyer, and playing a central role in processing financial transactions and managing exposures to diverse risks inherent in those transactions. CCPs centralise the handling of transactions and positions of counterparties, honour the obligations created by the transactions, and require adequate collateral from their members as margin and as contributions to default funds.

(3) The integration of Union financial markets has resulted in CCPs evolving from primarily serving domestic needs and markets to constituting critical nodes in Union financial markets more widely. CCPs authorised in the Union today clear several product classes, including listed and over-the-counter (OTC) financial and commodity derivatives, cash equities, bonds and other products such as repos. They provide services across national borders to a broad range of financial and other institutions across the Union. While some CCPs remain focused on domestic markets, they are all systemically important at least in their home markets.

(4) As a significant amount of the financial risk of the Union financial system is processed by and concentrated in CCPs on behalf of clearing members and their clients, effective regulation and robust supervision of CCPs are essential. Regulation (EU) No 648/2012 of the European Parliament and of the Council (4) requires CCPs authorised in the Union to observe high prudential, organisational and conduct of business standards. Competent authorities, working together within supervisory colleges which group together relevant authorities for the specific tasks allocated to them, are tasked with the full oversight of the activities of CCPs. In accordance with commitments entered into by G20 leaders since the 2008 financial crisis, Regulation (EU) No 648/2012 also requires standardised OTC derivatives to be centrally cleared by a CCP. As the obligation to centrally clear OTC derivatives comes into effect, the volume and range of business done by CCPs is likely to increase which could, in turn, provide additional challenges for risk management strategies of CCPs.

(5) Regulation (EU) No 648/2012 has contributed to the increased resilience of CCPs and of wider financial markets against the broad range of risks processed and concentrated in CCPs. However, no system of rules and practices can prevent existing resources from being inadequate in managing the risks incurred by a CCP, including one or more defaults by clearing members. Faced with a scenario of severe financial distress or impending failure, financial institutions should in principle remain subject to normal insolvency proceedings. However, as the 2008 financial crisis has shown, in particular during a period of prolonged economic instability and uncertainty, such proceedings can disrupt functions critical to the economy, jeopardising financial stability. Normal corporate insolvency procedures may not always ensure sufficient speed of intervention or adequately prioritise the continuity of the critical functions of financial institutions for the sake of preserving financial stability. In order to prevent such negative consequences of normal insolvency proceedings, it is necessary to create a special resolution framework for CCPs.

(6) The 2008 financial crisis highlighted the lack of adequate tools to preserve the critical functions provided by failing financial institutions. It further demonstrated the absence of frameworks to enable cooperation and coordination amongst authorities, in particular those located in different Member States or jurisdictions, to ensure the taking of swift and decisive action. Without such tools and in the absence of cooperation and coordination frameworks, Member States were compelled to rescue financial institutions using taxpayer money in order to stem contagion and reduce panic. While CCPs were not direct recipients of extraordinary public financial support in the 2008 financial crisis, they were protected from the effects that banks failing to perform their obligations would otherwise have had on them. A recovery and resolution framework for CCPs complements the bank resolution framework adopted under Directive 2014/59/EU of the European Parliament and of the Council (5), and is therefore necessary to prevent reliance on taxpayer money in the event of their disorderly failure. Such a framework should also address the possibility of CCPs entering into resolution for reasons other than the default of one or several of their clearing members.

(7) The objective of a credible recovery and resolution framework is to ensure, to the greatest extent possible, that CCPs set out measures to recover from financial distress, to maintain the critical functions of a CCP which is failing or likely to fail while winding up the remaining activities through normal insolvency proceedings, and to preserve financial stability and to avoid a significant adverse effect on the financial system and its ability to serve the real economy while minimising the cost to taxpayers of a CCP failure. A recovery and resolution framework further bolsters the preparedness of CCPs and authorities to mitigate financial distress and provide authorities with further insight into CCPs’ preparations for stress scenarios. It also provides authorities with powers to prepare for the potential resolution of a CCP and deal with the declining health of a CCP in a coordinated manner, thus contributing to the smooth functioning of financial markets.

(8) Currently, there are no harmonised provisions for the recovery and resolution of CCPs across the Union. Some Member States have already enacted legislative changes that require CCPs to draw up recovery plans and that introduce mechanisms to resolve failing CCPs. Furthermore, there are considerable substantive and procedural differences between Member States on the laws, regulations and administrative provisions which govern the insolvency of CCPs. The absence of common conditions, powers and processes for the recovery and resolution of CCPs is likely to constitute a barrier to the smooth functioning of the internal market and hinder cooperation between national authorities when dealing with the failure of a CCP and applying appropriate loss allocation mechanisms on its clearing members, both in the Union and globally. This is particularly true where different approaches mean that national authorities do not have the same level of control or the same ability to resolve CCPs. Those differences in recovery and resolution regimes might affect CCPs, clearing members and the clients of clearing members differently across Member States, potentially creating competitive distortions across the internal market. The absence of common rules and tools for how financial distress or failure in a CCP should be handled can affect clearing members’ and their clients’ choice to clear and CCPs’ choice of their place of establishment, thereby preventing CCPs from fully benefiting from their fundamental freedoms within the internal market. In turn, this could discourage clearing members and their clients from accessing CCPs across borders in the internal market and hinder further integration in the Union’s capital markets. Common recovery and resolution rules in all Member States are therefore necessary to ensure that CCPs are not limited in exercising their internal market freedoms by the financial capacity of Member States and their authorities to manage their failure.

(9) The review of the regulatory framework applicable to banks and to other financial institutions which has taken place in the wake of the 2008 financial crisis, and in particular the strengthening of banks’ capital and liquidity buffers, better tools for macro-prudential policies and comprehensive rules on the recovery and resolution of banks, have reduced the likelihood of future crises and enhanced the resilience of all financial institutions and market infrastructures, including CCPs, to economic stress, whether caused by systemic disturbances or by events specific to individual institutions. Since 1 January 2015, a recovery and resolution regime for banks has applied in Member States pursuant to Directive 2014/59/EU.

(10) Building on the approach for bank recovery and resolution, competent authorities and resolution authorities should be prepared and have adequate tools at their disposal to handle situations involving CCP failures. However, due to their different functions and business models, the risks inherent in banks and CCPs are different. Specific tools and powers are therefore needed for CCP failure scenarios caused by the failure of the CCP’s clearing members or as a result of non-default events.

(11) A regulation is the proper legal act to choose in order to complement and build on the approach established by Regulation (EU) No 648/2012, which provides for uniform prudential requirements applicable to CCPs. Setting recovery and resolution requirements in a directive could create inconsistencies by the adoption of potentially different national rules in respect of an area otherwise governed by directly applicable Union law and increasingly characterised by the cross-border provision of CCPs’ services. Therefore uniform and directly applicable rules on recovery and resolution of CCPs should also be adopted.

(12) In order to ensure consistency with existing Union legislation in the area of financial services, as well as the greatest possible level of financial stability across the Union, the recovery and resolution regime laid down in this Regulation should apply to CCPs that are subject to the prudential requirements laid down in Regulation (EU) No 648/2012, regardless of whether they have a banking licence. While there might be differences in the risk profile associated with alternative corporate structures, CCPs are stand-alone entities that are required to fulfil all requirements under this Regulation and under Regulation (EU) No 648/2012 independently from their parent undertaking or other group entities. The group of which a CCP forms part does not therefore need to be subject to this Regulation. The group dimension, including, inter alia, the operational, personal and financial relations of a CCP with group entities, should, however, be taken into account in the CCP’s recovery and resolution planning insofar it could affect the recovery or resolution of the CCP or insofar recovery and resolution actions could have an impact on other entities of the group.

(13) In order to ensure that resolution actions are taken efficiently and effectively, and in line with resolution objectives, Member States should appoint, as resolution authorities for the purpose of this Regulation, national central banks, competent ministries, public administrative authorities or authorities entrusted with public administrative powers to perform functions and tasks in relation to resolution, including any existing resolution authorities. Member States should also ensure that appropriate resources are allocated to those resolution authorities. In Member States where a CCP is established, adequate structural arrangements should be put in place to separate the CCP resolution functions from other functions, in particular where the authority responsible for the prudential supervision of the CCP, or prudential supervision of credit institutions or investment firms that are clearing members of the CCP, is designated as the resolution authority, to avoid any conflicts of interest and risk of regulatory forbearance. In such cases, the independence of the resolution authority’s decision-making process should be ensured, while not preventing decision-making from converging at the highest level.

(14) In light of the consequences that the failure of a CCP and the subsequent actions might have on the financial system and the economy of a Member State, as well as the possible ultimate need to use public funds to resolve a crisis, the Ministries of Finance or other relevant ministries in Member States should be able to decide, in line with national democratic procedures, on the use of public funds as a last resort and should consequently be closely involved, at an early stage, in the process of recovery and resolution. Therefore, with regard to the use of public funds as a last resort, this Regulation should be without prejudice to the distribution of competences between the relevant ministries or the government and the resolution authority as provided for in the legal systems of Member States.

(15) As CCPs often provide services across the Union, effective recovery and resolution requires cooperation among competent authorities and resolution authorities within supervisory and resolution colleges, notably at the preparatory stages of recovery and resolution. That includes assessing the recovery plan developed by the CCP, contributing to and reaching a joint decision on resolution plans drawn up by the resolution authority of the CCP, and addressing any impediments to resolvability of the CCP.

(16) The resolution of CCPs should strike the balance between the need, on the one hand, for procedures that take into account the urgency of the situation and allow for efficient, fair and timely solutions and, on the other, the necessity to protect financial stability in the Member States where the CCP provides services. The authorities whose areas of competence would be affected by the failure of a CCP should share their views in the resolution college to achieve those objectives. This should include in particular sharing information on the preparation of clearing members and, where relevant, clients with regard to potential default management, recovery and resolution measures and the supervisory treatment of the related exposures towards the CCP. The authorities of Member States whose financial stability could be impacted by the failure of the CCP should be able to participate in the resolution college based on their assessment of the impact that the CCP’s resolution could have on financial stability in their respective Member State. Member States should have the possibility to be represented in the resolution college by the competent authorities and resolution authorities of clearing members. Member States which are not represented by clearing members’ authorities should be able to participate by choosing between participation in the college of the competent authority of clearing members’ clients and of the resolution authority of clearing members’ clients. The authorities should provide appropriate justification for their participation, based on their analysis of the negative impact that the CCP’s resolution could have on their Member States, to the resolution authority of the CCP. Similarly, in order to ensure a regular exchange of views and coordination with relevant third-country authorities, these should be invited to participate in resolution colleges as observers where necessary.

(17) In order to address the potential failure of a CCP in an effective and proportionate manner, authorities should take into account a number of factors when exercising their recovery and resolution powers such as the nature of the CCP’s business, ownership structure, legal and organisational structure, risk profile, size, legal status, substitutability and interconnectedness to the financial system. The authorities should also take account of whether its failure and subsequent winding up under normal insolvency proceedings would be likely to have a significant negative effect on financial markets, on other financial institutions, or on the wider economy.

(18) In order to deal in an efficient manner with failing CCPs, competent authorities should have the power to impose preparatory measures on CCPs. A minimum standard should be established as regards the contents and information to be included in recovery plans to ensure that all CCPs in the Union have sufficiently detailed recovery plans should they face financial distress. Such recovery plan should contemplate an appropriate range of scenarios, envisaging both systemic and specific stresses to the CCP, that would endanger its viability, also taking into account the potential impact of contagion in a crisis, both domestic and cross-border. The scenarios should be more severe than those used for the purposes of regular stress testing pursuant to Article 49 of Regulation (EU) No 648/2012, while remaining plausible. The recovery plan should cover a broad range of scenarios including scenarios resulting from default events, non-default events and a combination of both; and should include comprehensive arrangements for the re-establishment of a matched book, for the full allocation of losses arising from clearing member default, and adequate absorbency for all other types of losses. Recovery plans should distinguish between different types of non-default events. The recovery plan should form part of the operating rules of the CCP agreed contractually with clearing members. Those operating rules should further contain provisions to ensure the enforceability of recovery measures outlined in the recovery plan in all scenarios. Recovery plans should not assume access to extraordinary public financial support or expose taxpayers to the risk of loss.

(19) CCPs should be required to draw up and regularly review and update their recovery plans. The recovery phase in that context should start when there is a significant deterioration in the CCP’s financial situation or risk of breach of its capital and prudential requirements under Regulation (EU) No 648/2012 that could lead to the infringement of its authorisation requirements that would justify the withdrawal of its authorisation pursuant to Regulation (EU) No 648/2012. This should be indicated with reference to a framework of qualitative or quantitative indicators included in the recovery plan.