“In a speech given by David Bailey, director, Financial Market Infrastructure, Bank of England at the Deutsche Börse Group and Eurex Exchange of Ideas conference in London on Monday this week, he warns against the possibility that CCPs may accrue too much risk. However, he provides them with a ‘get out’ clause should a CCP collapse, saying that the central bank should offer a “final backstop; and to provide continuity to the CCP’s critical economic functions, whilst providing an orderly wind-down for any non-systemic operations”.
Bailey acknowledges that “the international community has made very significant and tangible progress to ensure that CCPs are being held to higher risk standards and regulatory expectations,” but argues that more must be done. In particular, he says that further progress is needed to ensure that recovery and resolution regimes are robust, “credible and well understood so that they can be used to successfully minimise the impact of a failing CCP on financial stability.”
Robust risk standards, implemented consistently across jurisdictions are “clearly essential to ensure that CCPs deliver the outcome that we, and the G20, expect of them. That is to safeguard the financial system through the effective management of counterparty credit risk. Internationally, the 2012 CPMI-IOSCO Principles for Financial Market Infrastructure, as implemented within the EU by EMIR, have represented a significant step forward, resulting in more rigorous expectations of CCPs across their business and including important areas such as counterparty, liquidity and operational risk management”.
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