Furthermore, taxpayers should obviously not be liable for any losses incurred by CCPs. Losses should be entirely borne by the CCPs themselves and their participants, in an appropriate and proportional manner, and in line with prudent incentives. In particular, the involvement of indirect participants should be carefully considered: their contribution to the loss allocation process should take into account the fact that they have no contractual agreements with the CCP, and, unlike direct members, have no part in the CCP’s risk governance process (and therefore have no say in the CCP’s risk management). Lastly, the issue of compensating clearing members for losses incurred during a recovery or resolution process remains comparatively unexplored and deserves careful attention.10 Let me now turn to the various tools that authorities could use to address potential shortcomings in CCP risk management and loss-absorption capacities. These options have very different implications, namely in terms of sharing the funding needs between CCPs and participants, and in terms of providing the right incentives to CCPs’ stakeholders. Increasing the level of pre-funded resources held by CCPs to cover default losses beyond the current standards. One possible conclusion from the current review of the international implementation of regulatory requirements, and the analysis and assessments being carried out in parallel, could be that standards regarding margins and stress testing are sufficiently stringent, but are not implemented consistently across CCPs and jurisdictions.
In that case, this option will be available and there should be no technical obstacles to using it. But there can be no commitment from the central bank to provide liquidity, and that’s a basic principle of central banks in general, not only for CCPs but for banks as well.16 In sum, while some of these tools appear more appropriate than others, all of them imply drawbacks, and authorities will need to proceed cautiously if they favour one over another. CPMI-IOSCO is currently reviewing existing CCP recovery mechanisms, including loss allocation tools, and will consider developing more granular standards for CCP recovery planning if that is needed. 15  See Duffie, D., “Resolution of Failing Central Counterparties”, Graduate School of Business, Stanford University, 17 December 2014. 16  The recent agreement between the ECB and the Bank of England is no exception to this rule. We’ll extend the scope of our standing swap line in order to facilitate the provision of multi-currency liquidity support to CCPs established in the UK and euro area, but again, there is no pre-commitment and the provision of liquidity remains at the full discretion of the central bank issuing the respective currency.