David Bailey, director of financial market infrastructure at the Bank, said on Monday clearing houses may require a global standard for minimum capital levels similar to one recently announced for banks. Together with Benoît Cœuré, member of the executive board of the European Central Bank, he also called for more stress testing of clearing houses, as global regulators try to end “too big to fail” institutions that threaten the market stability.
Regulators and market participants have worried they could be the new focus of systemic risk. Some legislation covering the legal process if a clearing house fails has been put into place by national regulators but global standards vary. Global bodies such as the Financial Stability Board have sought to create minimum global standards.
Mr Bailey said there was an important question as to whether CCPs were resolvable in their current forms. “The FSB has recently proposed that there must be a minimum level of ‘Total Loss Absorbing Capacity’ (TLAC), for banks and we will need to consider carefully whether and how this concept could be effectively translated to CCPs,” he said. “In a similar vein, writing down operating liabilities through some form of initial margin haircutting should also be considered,” he added. His comments were echoed by David Wright, secretary-general of Iosco. “The more instruments that you have the better. You have to remember the costs of failure,” he said.
In coming days ISDA is expected to release a set of principles for clearing house recovery that recommends greater transparency on risk management and stress tests, according to a draft seen by the Financial Times. Europe is due to produce legislation to cover failing clearing houses next year. Mr Bailey said legislation should give resolution authorities power to recapitalise a failing CCP through writing down liabilities and converting them to equity. “Existing shareholders should be the first to bear the losses if this approach is to be taken,” he said. Mr Cœuré said regulators needed to better understand the systemic implications of pushing risk back to market participants, and to consider scenarios in which several clearing houses were threatened.
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