Recovery and Resolution Planning

Recovery and resolution planning refers to the strategic frameworks developed by clearing houses to handle extreme financial stress or insolvency. Recovery plans outline the actions the clearing house will take to restore its financial health and continue operations during a crisis.

This might include using the default waterfall, invoking assessment powers, or even reducing the payouts to non-defaulting members in a process called variation margin gains haircutting. Resolution plans, on the other hand, detail how the clearing house would be orderly wound down if recovery is not possible.

These plans are designed to minimize the impact on the broader financial system and protect market participants. Regulators mandate these plans for all systemically important financial institutions.

They are a critical part of the infrastructure that prevents a single failure from causing a systemic collapse. In the crypto space, these plans are becoming increasingly important as exchanges grow in size and complexity.

Developing these plans requires deep analysis of potential failure modes and the coordination of multiple stakeholders.