"The Risk Controllers: Central Counterparty Clearing in Globalised Financial Markets" 2  All speeches are available online at www.bankofengland.co.uk/speeches  2  These reforms are of course interlinked. If banks depend more on CCPs to manage their counterparty credit risk from derivative exposures, they need to be sure that CCPs are resilient and can absorb default shocks, especially at times of market stress. And CCPs – which exist to reduce risks faced by their member banks – depend on the resilience of their members. CCPs have a major interest in resolution regimes being in place that would allow their members to fail without triggering default and disruption. Central clearing  The financial crisis exposed complex and opaque webs of bilateral derivatives contracts both between financial firms and with real economy end users. These were often poorly collateralised or not collateralised at all. As asset prices fell sharply and concern about counterparty credit worthiness grew, bilateral margin calls acted as one of the main amplifiers of stress. Increasing and more unpredictable margin calls generated more selling pressure, further price falls and greater uncertainty. Instruments primarily designed to reduce risk, acted in the crisis as an amplifier of risk. Greater central clearing reduces systemic risk in derivatives markets and increases the resilience of the derivatives network. It replaces the complex web of bilateral trades with a more efficient network in which firms can offset positions to reduce the overall counterparty credit risk in the system.
The aim, as I have said, is to enable the bank’s critical economic functions to continue, without taxpayer support, while it is being resolved. A great deal has been achieved. 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  We now have agreed international standards covering the design of resolution regimes, the amount of ‘bail-inable’ resources banks must hold, and agreement with industry participants to ‘stay’ termination rights by counterparties in derivative and repo transactions if resolution is in train. Alongside this we also have international guidance on how to ensure continuity of access to FMIs as well as on the mechanics of executing a bail-in. The UK now has in place a comprehensive and effective bank resolution regime that implements the EU’s Bank Recovery and Resolution Directive (BRRD) and the international standards. The Bank of England has been established as the UK’s resolution authority with a wide range of powers to ‘bail in’ shareholders and creditors of failed banks. The biggest UK banks have begun to issue bail-inable debt at scale and are well on their way to meeting the target for loss absorbing resources in resolution. 7  Key policies and guidance to firms have been issued, notably on operational continuity and on the internal distribution of loss absorbing resources. Last October the Bank, with the publication of the Purple Book, the Bank set out in detail its approach to resolution and how it would tackle a failing bank.