Bank of England Deputy Governor Paul Tucker said regulators need legal powers to allow them to commandeer clearinghouses that are close to failure.
Watchdogs responsible for financial stability “need the power to take control of a central counterparty that is no longer viable, or doomed to become unviable, and where there is no reasonable prospect of its recovery,” Tucker said in an article published as part of a conference in New York today.
The Group of 20 nations has ordered a global overhaul of rules governing derivatives contracts, mandating the use of CCPs by traders. Regulators have sought tougher rules for over-the-counter derivatives since the collapse of Lehman Brothers Holdings Inc. in 2008 and the rescue of American International Group Inc., two of the largest traders of credit-default swaps.
“The timetable for strengthening resolution regimes must keep pace with the timetable for the mandatory central clearing of standardized derivatives,” Tucker said in his article for the French central bank’s Financial Stability Review.
Officials should also be able to impose losses on the surviving members of a clearinghouse when other buffers are depleted, Tucker said. CCPs should also keep a portfolio of easy-to-sell assets to withstand liquidity shocks without resorting to emergency central bank funding, he said.
While he noted that there may be shocks of such a magnitude that central banks will need to provide liquidity to a “solvent and viable CCP at short notice,” authorities are “absolutely not committing to provide such support.”
“Private-sector liquidity absolutely must be the first port of call, and so CCPs should not rely on central bank funds in their liquidity planning,” said Tucker.
Clearinghouses such as London’s LCH.Clearnet Ltd. and Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the risk that a trader defaults on a deal.
“The system will not be resilient unless the CCPs themselves are safe and sound and capable of orderly resolution,” said Tucker.