LONDON (MNI) – The failure of a central clearing party (CCP) would
be a disaster and how they are designed, managed and overseen poses a
challenge that regulators will have to come back to time and again in
the years to come, Bank of England Deputy Governor Paul Tucker said
Wednesday.
Tucker highlighted the role CCPs can play in aiding financial
stability, and the risk they pose if they get things wrong.
The comments were made in a speech at an event organised by the
Depository Trust and Clearing Corp. and the Centre for The Study of
Financial Innovation.
CCPs, such as NYSE-LIFFE/BClear, LCH.Clearnet and Eurex, should act
as system risk managers, Tucker said. He urged them not to engage in
“heavily procyclical margining policies” – easing margins substantially
in the good times and tightening them in the bad.
“There is an important question of whether the macroprudential
authorities should be able to require changes in initial margin levels
in the face of market exuberance. In the UK, there will be a debate
about whether the Bank of England’s Financial Policy Committee should
have that power,” Tucker, who is a member of the FPC, said.
Tucker also urged CCPs to keep an eye on the soundness of their
members and the risks attached to them.
He highlighted the risk that the failure of a CCP would pose to
financial stability as a whole.
“It is an understatement that it would be a disaster if a clearing
house failed. Commentators have, indeed, been emphasising that CCPs are
becoming systemic. To my own way of thinking, they have already been
systemic for the markets they clear for a very long time,” Tucker said.
He encouraged debate on how best to handle CCP failure and said the
two key issues were how to recapitalise a CCP and how to unwind its
book of transactions.
“It seems to me that questions about orderly resolution of a failed
CCP have to involve clarity around the extent to which surviving
clearing members pick up the pieces,” Tucker said.
“The design, management and oversight of CCPs is something that we
are going to come back to again and again in the years ahead,” he
concluded.
–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$B$$$,M$$BE$]