The World Federation of Exchanges (WFE), the global industry group for exchanges and CCPs, is today setting out how CCPs ensure that certain non-credit losses that might rarely occur in relation to central clearing are allocated in a transparent, predictable and equitable manner.

WFE guidance addresses the treatment of such ‘non-default losses’ (NDLs) as part of its 2019-2020 programme of work on incentives in clearing; and in the context of CCPs’ mission to manage the timely and effective reduction of counterparty credit risk within the financial system.

CCPs work collaboratively with users and supervisors to make derivatives contracts and securities transactions credible and systemically manageable, by minimising the impact of disruption from user default. As such, clearing houses are an integral part of exchange-traded financial markets and also support a large proportion of OTC derivatives.

Clearing houses have supported markets through recent COVID-pandemic volatility, continuing to perform the crucial role recognised by policy-makers after the global crisis of 2008. In doing so, they require market participants to back the risks they take (by posting margin and other resources). For their part, CCPs back their own business offering with capital. This will typically be used to absorb certain non-default losses. But that process remains subject to the practical reality that CCP users may appropriately share liability (for example, this may be the case if they also benefit from any associated rewards), in which case it will be in a manner set out by the clearing house’s rule book.

Nandini Sukumar, Chief Executive Officer of the WFE, said: “Non-default losses may not be the main risk faced by CCPs, but it is still important to have a structured approach to dealing with them. That way, CCPs can devote more time to their day job, ensuring that uncertainty over counterparty credit exposures does not threaten the integrity of the financial system. This is why the WFE has taken the initiative to highlight the responsible, constructive practices employed by clearing houses in relation to potential incidents and their financial consequences if any.”