Better Markets filed a comment letter with the Commodities Futures Trading Commission (CFTC) regarding amending the requirements related to recovery and orderly wind-down and resolution planning for Derivatives Clearing Organizations (DCOs).
Why it Matters. Derivatives Clearing Organizations (DCOs) play an indispensable role within our financial markets, serving as the linchpin for essential clearing and settlement market infrastructure. During moments of heightened stress and uncertainty, DCOs assume a critical role by providing the vital services necessary for maintaining continuity in the financial markets they serve. The global adoption of the central clearing mandate has ushered in a notable escalation in clearing volumes across the swaps market. However, the act of clearing, despite its many advantages, is not devoid of inherent risks. In recognition of this, market regulators must take proactive measures to ensure that clearinghouses are not merely commercially viable entities but are also well-prepared to operate effectively and provide their indispensable services as anticipated, even when confronted with extreme market stressors.
What we said. Better Markets supports the CFTC’s proposed rule, recognizing the crucial role played by DCOs in maintaining market stability, particularly during challenging times. The proposal aims to codify and expand upon existing guidance, outlining specific requirements for systemically important DCOs to provide information for resolution planning to the Commission. Through improved risk management, increased resilience, and reinforced contingency planning, the proposed rule enhances predictability in the face of unexpected disruptions to DCO operations. Emphasizing the need for robust recovery and wind-down plans within DCOs’ risk management frameworks, the proposed rule strives to prevent market losses and spillover effects. Better Markets believes it is imperative for all DCOs, not just the largest ones, to establish these plans, in alignment with the CFTC’s commitment to safeguarding the integrity and stability of the financial system, as outlined in the proposed rule.
Bottom Line. Better Markets supports the CFTC’s proposed rule, emphasizing the critical role of DCOs in ensuring market stability, expanding guidance, requiring DCOs to provide essential resolution planning data, enhancing predictability, and emphasizing comprehensive recovery and wind-down plans to prevent disruptions, all aligned with the CFTC’s commitment to maintaining the integrity and stability of the financial system.
You can find the comment letter here.