BIS central bankers’ speeches  1  Second, guidance on CCP recovery and resolution: in 2014, as a supplement to the PFMI, CPMI-IOSCO published comprehensive guidance on financial market infrastructure (FMI) recovery.3 It considered the types of tools that CCPs and other FMIs can use to deal with severe financial problems that could threaten their existence. In addition, the FSB adopted a framework on FMI resolution.4 Third, specific treatment of banks’ exposures to CCPs: the BCBS has revised its previous Basel II capital framework, which applied a zero capital charge to banks’ exposures to CCPs, in order to better capture the risks stemming from the financial system’s increasing reliance on CCPs. One of the main features of this revised framework is the preferential treatment given to exposures to qualifying CCPs, i.e. CCPs supervised in a manner consistent with the PFMI. Finally, enhancing the understanding of CCP risks via increased transparency: in order to ensure CCPs are providing participants with the necessary information to evaluate the risks linked to clearing, CPMI and IOSCO have published two disclosure frameworks. The Disclosure Framework and Assessment Methodology,5 released in December 2012, and The Public Quantitative Disclosure Framework6 for CCPs, released in February 2015, which require CCPs to disclose information on topics such as the size of their credit risk, liquidity risk, collateral, margins, business risk, custody and investment risks. Let me add that public disclosure requirements are particularly important for indirect members who, unlike direct members, do not play a direct role in the CCP’s risk governance.
Should authorities be doing more to address potential weaknesses in CCP risk management? As I just mentioned, the regulatory standards have been significantly strengthened since the financial crisis. However, catastrophic losses beyond those already covered by the regulatory requirements could still occur. Given the critical role of CCPs in financial markets, regulators need to think the unthinkable. Indeed, stress events concerning CCPs are – thankfully – rare: the most recent example of a CCP failure was the collapse of the Hong Kong Futures Exchange clearing house in 1987. A more recent – albeit less dramatic – stress event was the uncertainty caused by the default of a clearing member at KRX, the South Korean CCP, which caused it to tap its mutualised default fund, and revealed that clearing members were not always aware of their potential liabilities towards the CCP. When such events occur, they have the potential to shut down the markets they serve. With the emergence of supersystemic CCPs serving global derivatives markets, a CCP failure could be a catastrophic event of global proportions. In September 2014, the gross notional outstanding amount of centrally cleared positions was estimated at USD 169 trillion for OTC interest rate derivatives, and at USD 14 trillion for credit derivatives.7 The sheer magnitude of these figures (around ten times the GDP of the United States or European Union) gives us an idea of the severity of the potential consequences from a stress event at a major global CCP.