At the other end of the spectrum, there is an important question of whether the macroprudential authorities should be able to require changes in initial margin levels in the face of market exuberance. In the UK, there will be a debate about whether the Bank of England’s Financial Policy Committee should have that power. The Basel Committee of the Global Financial System has already produced a report on it.1 In a different dimension, there is an important question about whether clearing houses should adopt what is called Gross Margining rather than Net Margining. What this means is that a clearing member – ie a dealer – could not net off positions of their various customers and their own house position when the amount of margin they have to hold with the clearing house is determined. That would affect the incentives of clearing members to collect minimum margin amounts from their customers. And, more generally, it would probably reduce the amount of leverage in the system and simplify the chain of credit. In terms of public policy objectives, this is, therefore, about more than investor protection through the segregation of client moneys, and so needs to be debated against the goal of preserving stability without impairing efficiency. The resolution of CCPs If CCPs can do a lot of good by simplifying the network of counterparty exposures and imposing standard valuations and margin requirements, conversely it is an understatement that it would be a disaster if a clearing house failed.
A pre-programmed allocation of losses would be akin to the old “Down To The Last Drop” rule that used to be employed by a Chicago clearing house, under which surviving clearing members ultimately had collectively to absorb all losses: mutualisation. (It was dropped because, as banks became futures-exchange clearing members, bank supervisors didn’t like the unlimited exposure of CMs who were banks. An example of unjoined-up thinking.) That’s the option around propping up the clearing house to keep it going. The other option is some kind of wind down of the Clearing House’s book. That involves a combination of closing out part of the book in the market, and doing something with any residue that can’t be dealt in the market. One obvious thing to do with the residue is to put it back, pro rata, to the surviving (and fit) clearing members. But that is also a variant of the DTTLD rule, but “in kind” rather than cash. BIS central bankers’ speeches  3  Maybe I’ve got this wrong but, in summary, it seems to me that questions about orderly resolution of a failed CCP have to involve clarity around the extent to which surviving clearing members pick up the pieces. Summary The design, management and oversight of CCPs is something that we are going to come back to again and again in the years ahead.