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18 December 2015

Bank of England: CCP resolution and the ending Too Big to Fail agenda - speech by Andrew Gracie

BoE's Gracie says that one of the goals of global reform since the financial crisis has been ending Too Big to Fail. This is the resolution agenda – aiming to ensure that in the event that a G-SIFI fails there is minimal interruption of the activities of a firm.

​Speech given at 21st Annual Risk USA Conference, New York on 22 October 2015

Mr Andrew Gracie highlights some key points:

  • CCP resolution is both a necessary and inevitable part of the overall post-crisis reform agenda to end Too Big to Fail. As private, profit-making enterprises CCPs must be allowed to fail, but, given their systemic importance, many will need to be allowed to do so in a manner that maintains the continuity of their critical functions.
  • Having a credible resolution regime for Clearing Members is a big step forward in helping to reduce the risk of clearing member default and from that the risk of CCP failure.
  • But reliance on successful resolution of members does not negate the need for CCP resolution arrangements to be capable of responding to both default and non-default losses emerging from both systemic and idiosyncratic shocks. 
  • In thinking about the underlying objectives and needs of a CCP resolution regime, there are many similarities to bank resolution and these should not be forgotten, but clearly there are many differences too and there is need to recognise that.
  • Effective resolution requires the ability to act promptly and before the point at which the chance of stabilising the CCP is lost. The resolution authority must have a variety of tools at its disposal to enable it to respond to the reason the CCP failed. It should be able to intervene in a timely and forward-looking way before the end of the waterfall – but incentives must be aligned and this to be set up in a way that promotes CCP resilience and makes recovery work.
  • In order to continue a CCP’s critical services in resolution, there must be an ability both to cover the losses credibly in a failure scenario and to recapitalise the CCP’s going concern resources – i.e. its capital, margin and default fund. How this will be achieved this is something for FSB to address so that the shared interest in maintaining stability in the global financial system can be realised.

Full speech

© Bank of England

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