There needs to be extremely high levels of resilience at CCPs and effective recovery and, in extremis, resolution options were a CCP to fail. So we need to have confidence in the sequential lines of defence that are in place to manage risks and absorb shocks within CCPs and in how resolution might provide a backstop. Clearing members themselves are the first line of defence  CCPs are not risk-taking entities. Rather, they are mechanisms for the management and for the mutualisation of their members’ credit counterparty risk. Their greatest, though not only, vector of risk is the default of one or more of their members. Ensuring that those members are able to continue to meet their obligations to CCPs is clearly the first line of defence. There has been a very substantial increase, since the crisis, in the resilience of the systemically important banks that are the main members of the largest CCPs. 55  A recent FSB survey found that exposures to CCPs are concentrated among a small number of institutions. And clearing member affiliates are also important providers of other critical services required by CCPs such as liquidity and credit providers or custodian and settlement banks. A small number of entities tend to dominate each resulting network. These concentrations suggest that shocks to one central element of each CCP network would likely have significant consequences for the rest of the network. FSB report ‘Analysis of central clearing independencies’, July 2017.
For resolution to have maximum effectiveness, banks not only need to be able to meet the policy standards and have sufficient loss absorbing capacity. They need also to have the capabilities to be ready to implement a resolution, the legal and operational arrangements in place to avoid disruption to customers. It needs to be possible to restructure a firm so that it can be made viable post-resolution. So the next phase of work will focus on ensuring that major banks have and are able to demonstrate that they have the systems, documentation, assurance and controls necessary to support their resolvability. We intend to consult at the end of this year on the detail of this reporting and assurance framework. We envisage that it will require major UK banks to conduct a self-assessment of their resolvability – measured against the policies and standards that have been established nationally and internationally. In line with our commitment to Parliament, we would then publish our assessment of resolvability for the major UK banks, providing greater transparency over the key judgments of the Bank as Resolution Authority. In a similar vein the Bank envisages we may require that elements of firms’ self-assessments are made public – this would enable firm-specific progress on resolvability to be made more transparent. It is important to emphasise that this is the next step in the natural evolution of the resolution regime in the UK. The Bank has been formally assessing the resolvability of UK firms since 2014.