BoE's Carney: liquidity support for CCPs is a 'last-resort option'


Central counterparties (CCPs) will receive liquidity support from the UK central bank only as a last resort, Mark Carney, governor of the Bank of England (BoE) has warned – under all other conditions, a CCP must be able to get by on its traditional waterfall of financial resources.

"It is extremely important that CCPs organise themselves to make sure they can provide the necessary resilience plan through the waterfall arrangements that are in place – and through their own liquidity insurances – to the extent they can cover the failure of one or two major institutions," Carney said, responding to a question from Risk at a BoE press conference in London today.

That adds colour to a speech Carney delivered on October 25, when he said the BoE would consider providing financial market infrastructures with access to its traditional liquidity facilities.

Liquidity planning has become a controversial topic for clearing houses, after the Commodity Futures Trading Commission (CFTC) ruled earlier this month that a CCP could only count government securities as part of its liquidity resources if they are supported by committed funding arrangements – standby repo facilities, for instance – that would allow the clearing house to convert securities into cash at the drop of a hat.

CCPs have generally considered US Treasuries and some other high-quality government bonds to be as good as cash – CME Group has accused the CFTC of going further than the international principles with which the rule was intended to comply, leaving the CCP at a disadvantage to rivals elsewhere.

It is extremely important that CCPs organise themselves to make sure they can provide the necessary resilience

One solution would be for a clearing house to turn to central banks for short-term support – and Germany's Eurex makes much of its ability to obtain intra-day liquidity from the Bundesbank if necessary. Other central banks are still debating how to ensure CCPs remain robust as an increasing volume of over-the-counter derivatives is funnelled in their direction, and the message from the BoE's Carney is that clearing houses should be able to stand on their own two feet.

As a lender of last resort, specific rules would enable the BoE to provide liquidity to CCPs. "But this is more than anything else a last-resort option instead of a first-resort option," he said.

As well as having the resources to cope with a liquidity shortage, regulators are also trying to finalise recovery and resolution plans for a stricken CCP – the battery of measures that would kick in if losses overwhelmed traditional financial resources such as variation and initial margin, a CCP's own capital, and member-funded default funds. In its most recent financial stability report, released today, the BoE reiterated the need for CCPs to put in place appropriate contingency plans.

By February 2014, UK-regulated CCPs will be required to introduce loss-allocation rules that specify how they would absorb any end-of-waterfall losses arising from one or more clearing members defaulting. This could include haircuts of variation or initial margin, or the forced close-out of cleared trades. CCPs will also be required to introduce similar arrangements for losses arising from other sources – such as investment losses – by May 2014.

"We made absolutely clear that we want CCPs to have the same detailed, credible recovery and resolution plans as the big banks. There has been a lot of progress made over the past six to 12 months to find the appropriate tools to do so. In the CCP context that means putting in place loss-allocation rules for clearing members," said Andrew Haldane, executive director financial stability at the BoE, at this morning's press conference.

Internationally, this work is being guided by the Key attributes of effective resolution regimes for financial institutions, a Financial Stability Board (FSB) text published in 2011, which was updated in August to include a section on non-bank institutions such as clearing houses. The FSB will be reviewing adherence with the key attributes in the UK next year.

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