Amid ongoing global efforts to ensure the integrity of the financial industry infrastructure, CDS Clearing and Depository Services Inc. is proposing the creation of a new default fund.
In the latest OSC Bulletin, the clearing firm CDS proposes rule amendments in order to create a new fund to guard against losses due to participant defaults.
According to the notice announcing the proposals, CDS identified the need to create a default fund in order to comply with new principles adopted by global regulators in the wake of the financial crisis, which are designed to ensure the stability of critical market infrastructure.
The notice indicates that default funds are fundamental risk management tools for central counterparties (CCPs). “They are prefunded default arrangements composed of assets that have been contributed by a CCP’s participants and which may be drawn upon by the CCP in certain circumstances to cover losses or liquidity pressures resulting from participant defaults,” it says.
The notice indicates that these sorts of default funds are expected to be universally adopted by the central counterparties that follow the global regulators’ principles for financial market infrastructure. And, it notes that many CCPs already have these sorts of funds in place.
Comments on the proposals are due within 30 days.