BIS central bankers’ speeches  5  liquidity to meet their obligations: the CCP would simply perform a write-down of its outgoing payment obligations to clearing members with “in the money” positions. To the extent that this tool would hit members which are not liquidity- constrained, it is more reliable and the systemic impact could be less. So although it could lead to unequal loss allocation among clearing members and create ex ante uncertainty on the burden sharing of the cost of default,15 it could also mitigate pro-cyclicality concerns to a certain extent. Another series of measures to be considered by authorities are the voluntary or forced allocation of open positions among clearing members. These measures would help CCPs reestablish a matched book following a participant default. In my view, if authorities choose to promote these tools, we should take care to encourage voluntary measures to the extent possible. Indeed, forced allocations could lead to effects which are difficult to control, for example by requiring participants to take on positions which are not closely related to their clearing activities, and for which they cannot adequately measure risks, particularly in volatile market conditions. A last-resort option could be a partial or complete tear-up of open positions, but this could cause significant disruption to the products and markets where contracts are terminated, and therefore should be avoided to the extent practicable. A solution which seems to be supported by parts of the industry would be to dedicate an additional tranche of the CCP’s capital for recovery needs.
While increases could be discussed, I believe it may not be advisable – for the reasons already outlined above – to place the entire burden of extra loss-absorption on CCPs. For the sake of completeness, I would also like to mention alternative recovery tools such as the proposal by a consortium of insurers to provide coverage for extreme tail losses, or the idea that CCPs should issue bail-in-able debt instruments. Such solutions deserve consideration as they can enhance market discipline, but they require further analysis before being truly considered as viable options by authorities. For example, it is unclear whether there would be a deep enough market for CCP bail-in-able debt, given the tail nature of the risk being priced, and the risk that demand will be exhausted once the total loss-absorbing capacity proposal for banks is calibrated and implemented. You will note that I have not made any mention of emergency liquidity provision to CCPs by central banks. A fundamental principle is that it is up to the CCP to maintain adequate and robust liquidity arrangements, both in normal and crisis times. If a clearing house believed that it could easily and readily access central bank liquidity, this would weaken its incentives to make the necessary arrangements. Of course, there can be cases where all the necessary arrangements have been made but the CCP is facing losses beyond what was predicted and needs temporary liquidity support while remaining solvent.