Furthermore, in order to represent any meaningful part of the default waterfall, “skin in the game” would need to increase dramatically, thus completely changing the size of CCP balance sheets and their business models. This could even defeat the purpose of mandatory central clearing by pushing CCPs to dramatically increase the cost of clearing, or to compromise on their risk management in order to retain profitability. In sum, it seems reasonable that an increase in prefunded resources, should it become necessary, should be mainly borne by clearing members. Strengthening CCP recovery capabilities via specific recovery tools. An alternative conclusion to our current discussions could be that cover 2 is an appropriate standard for ensuring CCP resilience in a pre-recovery phase, but that more reassurances are needed to ensure CCPs can adequately cope with a recovery situation if they face tail losses. Let me stress that, here too, it is too early to state whether and, if so, what additional guidance regarding recovery capacities will be needed. However, let us think about the ways in which authorities could improve CCP recovery tools if the need did arise.13 In a recovery situation, a significant amount of additional funding could come from ex post cash calls on non-defaulting clearing members, also referred to as “default fund top-ups” or “emergency assessments”. This could provide CCPs with ample resources to avoid a complete depletion of their capital, and would share the funding burden across the whole clearing membership.
In that case, this option will be available and there should be no technical obstacles to using it. But there can be no commitment from the central bank to provide liquidity, and that’s a basic principle of central banks in general, not only for CCPs but for banks as well.16 In sum, while some of these tools appear more appropriate than others, all of them imply drawbacks, and authorities will need to proceed cautiously if they favour one over another. CPMI-IOSCO is currently reviewing existing CCP recovery mechanisms, including loss allocation tools, and will consider developing more granular standards for CCP recovery planning if that is needed. 15  See Duffie, D., “Resolution of Failing Central Counterparties”, Graduate School of Business, Stanford University, 17 December 2014. 16  The recent agreement between the ECB and the Bank of England is no exception to this rule. We’ll extend the scope of our standing swap line in order to facilitate the provision of multi-currency liquidity support to CCPs established in the UK and euro area, but again, there is no pre-commitment and the provision of liquidity remains at the full discretion of the central bank issuing the respective currency.