Having clarified this point, I can potentially see four main ways of increasing resolution capacity: The first would be to increase the amount of regulatory capital held by CCPs, and explicitly ring-fence a share of this capital as a means to recapitalise a new entity in a resolution scenario. In the EU, CCPs are required to hold sufficient own resources to cover operating costs over a six-month period – this requirement could be strengthened, not only in order to cover for a potential wind-down, but also to meet the funding costs of a new entity. For the reasons described above, I believe there would be important drawbacks in relying only on CCPs to increase their regulatory capital. CCPs should provide a proportional contribution to the resolution process, but should not bear all the costs. A second policy option could be to make use of initial margin haircutting as a means to fund the resolution process and establish a new CCP. While this would provide CCPs with significant resources, mutualised across the entire clearing membership, and could provide a base for re-launching a viable CCP with some degree of certainty over the sharing of losses, it would also imply a significant change in the way clearing members understand their liabilities towards the CCP – indeed, in certain jurisdictions, initial margin currently has to be bankruptcy-remote. It would be difficult to predict the potential pro-cyclical effects resulting from this tool, as well as the effects on incentives for members to take part in central clearing.
Whether we choose to bolster the tools for CCP resilience, CCP recovery or CCP resolution, we will need to be aware of potential trade-offs in the way losses are allocated, and remember that there may be no ideal approach. I have provided an overview of the pros and cons of these various approaches. It will be crucial not to lose sight of the systemic view when discussing CCP loss absorption, and to pay close attention to the interconnections between CCP exposures and bank exposures, and to the impact of CCP risk-management on pro-cyclicality in the global financial system. I look forward to learning from our discussions today and I hope they will shed new light on some of the trade-offs I have identified. Thank you for your attention. 10  BIS central bankers’ speeches