They exist to manage and reduce the risks faced by their members – to ensure financial contracts are reliably and transparently margined and collateralised. The main prudential risks CCPs face is from the failure and consequently inability of clearing members to meet their obligations to the CCP. The steps that have been taken since the financial crisis to increase the resilience and resolvability of their bank clearing members are therefore a key protection for CCPs. But CCPs also need the backstop of a credible resolution regime. The principal challenge here is not solvency per se but rather the ability of a CCP to restore itself to a matched book if members default, and to do so in a way that does not undermine the stability of the system. CCP rule books provide for very substantial mutualised resources and a comprehensive series of recovery actions. These include, as a last resort, the cancellation or ‘tear up’ of contracts and the end of the clearing service. However, waiting until the mutualised resources of a CCP are exhausted and subjecting participants to the unpredictability of a full tear-up may well pose unacceptable risks to financial stability. Resolution allows the resolution authority to intervene, if necessary, to tear-up a subset of contracts earlier in the process than would be possible in CCP recovery, and before the mutualised resources in the CCP have run out. The losses can then be spread across the membership in the order set out in the rule-book.
Furthermore, in some cases housing prices did go up high, with clear indications that there was a bubble. However, their financial systems made it through and remained stable and,  1  A flexible inflation targeting regime balances the cost of output fluctuations with those of inflation instability, and the result should be a decline in both, output and inflation volatility. For an exposition of this framework and how it relates to the definition of the inflation target parameters see De Gregorio (2009a). BIS Review 113/2009  1  despite the current difficulties, have avoided acute financial crises. This is the case of, for example, Australia and Spain. Naturally, when facing disproportionate increases in housing prices, both the increase in credit and the boom in construction are symptoms that the downturn will be severe. Still, this need not result in a systemic financial meltdown. In any case, monetary policy can and does help in the creation of bubbles, although not so much by the level of the interest rate but by the monetary policy strategy with which financial turmoil is dealt with. In the United States, the strategy of turning a blind eye to the period of soaring asset prices and then, when the bubble burst, reducing aggressively interest rates used to be the Fed’s strategy (the “mop-up strategy” according to Blinder and Reis, 2005). This approach was first used on the “Black Monday” of October 1987, then with the breakdown of Long-Term Capital Management (LTCM) and later with the bursting of the high-tech bubble.