BoE's Tucker touts CCP mutualisation
Thursday 2 June 2011 - by Nicola York
The deputy governor of the Bank of England says central counterparties should be mutualised to avoid the systemic risk they pose to the financial system if they fail.
The second option he proposes is winding down the clearing house's book which he says would involve a combination of closing out part of the book in the market and putting the residue back to the surviving clearing members. But this is also a variant of the down to the last drop rule, he says.
"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."
Tucker cited the "devastating" effects of the failure of the Hong Kong Futures Exchange in 1987 following the global stock market crash, saying this episode would have "entered the folklore of policy memory" if it had taken place in London or New York, and that it deserved more study.
CCPs are not sufficiently recognised as quasi regulatory bodies and must start thinking of themselves as system risk managers, he added.
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