In its response to the CPSS IOSCO consultative report on the recovery of financial market infrastructures, the World Forum of CSDs makes 6 key recommendations to global regulators:
- CSDs should have sufficient discretion and flexibility to choose the most appropriate recovery tools and their sequence: Indeed, CSDs are different from CCPs in that they typically do not have a “default waterfall”, and in case of a major crisis, it is important that recovery of a CSD is not hampered by a rigid sequence that might not be appropriate to the particular situation.
- The report should clarify which tools apply to which type of infrastructure: While some recovery tools covered in the report will never be applicable in the case of CSDs, others are likely to apply to most CSDs. Others might only be relevant for a few CSDs, such as those operating under a banking license. To facilitate implementation, the WFC suggests that CPSS and IOSCO add a summary table specifying which tools may (but do not always have to) be used by each type of infrastructure.
- The report should recognize that loss sharing will in many cases not be applicable to CSDs: Most CSDs are not exposed to material credit risk in relation to their participants and their viability should thus not be affected by the default of a participant. Loss allocation will thus often not be appropriate and could actually create inappropriate incentives in the case of CSDs. Indeed, the requirement for participants to share in the losses caused by the default of another participant could lead these participants to reconsider their relationship with the CSD, potentially resulting in the usage of less regulated entities which are not subject to loss allocation for services similar to those provided by CSDs.
- The distinction between recovery and resolution could be clarified.
- CSDs should communicate transparently to their participants, but the full recovery plan should not be a public document.
- CSD recovery plans should consider the impact of recovery on third parties, taking into account limitations on access to information on third parties: CSDs often do not have the tools (legally or operationally) to identify and gather information on indirect participants, and thus do not usually have sufficient information to assess the potential impact of recovery measures beyond direct participants. Such limitations should be taken into account.