Principles for Recovery and Resolution of a Financial Market Infrastructure ACSDA Senior Leadership Summit – November 16 & 17, 2015

Agenda Introduction Recovery planning – key considerations Importance of Critical Services Stress Scenarios Triggers Recovery Tools Risk management and recovery Questions to delegates

A. Introduction

A. Introduction The CPMI-IOSCO Principles for Financial Market Infrastructures (“PFMIs”) are designed to ensure Financial Market Infrastructures (“FMIs”) operate as smoothly as possible in normal circumstances and in times of market stress Principle 3, Framework for the comprehensive management of risks, requires “an FMI prepare appropriate plans for its recovery or orderly wind-down… Where applicable, an FMI should also provide relevant authorities with the information needed for purposes of resolution planning.” Principle 3 further states “an FMI should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down” Given the systemic importance of the FMIs, the disorderly failure of an FMI would likely lead to systemic disruptions to the institutions and markets supported by the FMI, to linked FMIs, and to the financial system Recovery and resolution plans are established to allow (a) the recovery of the FMI so that its critical operations and services may be sustained, or (b) the winding down of the non-viable FMI in an orderly manner, for instance by transferring the FMI’s critical operations and services to an alternate entity

B. Recovery planning – key considerations

B. Recovery planning – key considerations A CPMI-IOSCO requirement Responsibility for developing is the FMI’s Board of Directors’ endorsement Clearly defined governance framework Provide procedures to allow an FMI to recover in order to continue to provide its critical services Recovery plan allows key stakeholders to prepare for extreme events and increases the probability that the appropriate recovery tools will be identified, available and used Uncovered losses should be borne by the FMI’s, its owners’ and its participants’ resources The interests of those bearing uncovered losses should be considered

B. Recovery planning – key considerations (cont’d) Recovery plan should not assume state or central bank support Recovery plan and recovery tools should be legally enforceable For example tools to allocate uncovered losses Recovery plan should clearly define the FMIs discretion to apply the available recovery tools A balance needs to be struck between the automatic use or discretion when applying a recovery tools Recovery plans should be tested May be conducted in conjunction with annual default management exercises

C. Importance of Critical Services

C. Importance of Critical Services Systemic importance to financial system Failure of an FMI could result in severe disruptions to financial system Design of FMI should ensure that its critical services continue to function effectively even in times of severe market stresses – financial, operational, etc. Particularly important where there is only one FMI providing the critical service In some jurisdictions the transferring of the critical service to another entity is not a practicable option

C. Importance of Critical Services (cont’d) Recovery plans should identify the critical services it provides Typically includes services which are essential to the smooth functioning of the financial market and the maintenance of financial stability Payment services Central counterparty services Clearing and settlement services Depository services Identifying critical services focusses recovery plan on: Identifying the circumstances which may disrupt provision of the service (i.e., stress scenarios) What is needed to recover from such scenarios (i.e., through the application of recovery tools) What coordination is required with key stakeholders (i.e., owners, participants and relevant authorities)

D. Stress Scenarios

D. Stress Scenarios Stress scenarios are events which would prevent an FMI from providing its critical services as a going concern Identifying the stress scenarios should consider the various risks to which an FMI is exposed – including: Participant default Credit losses Liquidity shortfalls Investment losses General business losses Failures of critical service providers Failure of affiliated entities Linked FMI failures

E. Triggers

E. Triggers Recovery plans should have well defined criteria (“triggers”) which calls for a prompt response and the application of recovery tools to address a stress event Triggers should be both qualitative and quantitative Triggers help avoid delays Obvious examples of triggers include: Participant defaults Exhaustion of pre-funded financial resources Exhaustion of liquidity resources Less-obvious examples of triggers include: Chronic/persistent losses from operational issues which threaten the FMIs financial viability

F. Recovery Tools

F. Recovery Tools Recovery plans should identify its recovery tools; i.e., how it will cover financial and/or liquidity shortfalls (not covered by pre-funded resources) – including indicating the steps and time required to put them into effect Identifying which tool to use under which circumstance Assessing the impact of the stress event on the FMI, the owners, the participants, other key stakeholders Recovery tools should identify recovery tools for other risks (e.g., operational, critical service providers)…not just financial and/or liquidity shortfalls

F. Recovery Tools (cont’d) Stress scenarios which may require recovery tools: Participant default Credit losses Liquidity shortfalls Investment losses General business losses Failures of critical service providers Failure of affiliated entities Linked FMI failures

F. Recovery Tools (cont’d) Characteristics of recovery tools Comprehensive Effective Transparent, measurable, manageable and controllable Create appropriate incentives Minimize negative impact Examples of recovery tools Cash calls Variation margin haircutting Use of initial margin

G. Risk management and recovery

G. Risk management and recovery The CPMI-IOSCO PFMIs are designed to ensure systemically important FMIs have robust risk management frameworks which reduce systemic risk and foster transparency and financial stability Recovery planning should be integrated into the risk management governance framework of FMIs Recovery plans should identify scenarios and address what needs to be done to continue to provide the critical services Extreme scenarios which could threaten the viability of the FMI How the FMI can to continue providing its critical services – even under stress conditions The existence of recovery plans enhances financial market resilience and confidence The recovery plan should also address, in the event the FMI is not able to remain viable, the steps for the orderly resolution of the FMI

H. Questions to delegates

H. Questions to delegates Have your regulators provided guidance as to what is expected? What role does the regulator play in the decision to apply the different recovery tools? Is implementation or a recovery tool rule based or at the discretion of the FMI? What is the process for developing a Recovery and Resolution plan Regulatory expectations Canada – Phase I: December 2015 Define 1: Critical services Define 2: Stress scenarios Define 3: Triggers for recovery tools Regulatory expectations Canada – Phase II: December 2016 The recovery plan must be approved by CDS’ Board of Directors One recovery plan addressing each of the critical services Not the Resolution plan Has a resolution authority been appointed in your jurisdiction? What is going on in your respective jurisdictions?

Joseph I. Campos Stephen Pecchia Managing Director, Financial Risk Management TMX/CDS Stephen Pecchia Executive Director, Recovery and Resolution Planning DTCC