In a speech delivered at the Futures Industry Association’s (FIA) 2018 International Derivatives Expo in London, Jon Cunliffe, deputy governor for financial stability at the Bank of England, addressed the progress that has been made in the last few years to reform derivatives’ markets, how the concentration of counterparty risk in central counterparties (CCPs) is managed and explained why a resolution regime for CCPs is necessary.
He sets out why resolution for CCPs requires a very different approach to resolution for banks. The event that would require it would be “further into the tail of the probability distribution of bad events” than we require banks to withstand. But, he added “the crisis has taught us that we do need to think about such events” and he set out the objectives for a CCP resolution regime.
He also reflected on the development of the UK’s bank resolution regime – the process by which the Bank of England can step in to make sure that a bank that is failing does so in an orderly way – and why the effective and orderly resolution of a large bank is critical to the resilience of CCPs. With much of the policy on bank resolution now finalized, the Bank is increasingly focusing on implementation of the framework to make banks resolvable.
Cunliffe also noted that the BoE envisages requiring major UK banks to conduct a self-assessment of their resolvability – measured against established policies and standards, both nationally and in international fora: “This would make sure that they have and are able to demonstrate the systems, documentation, assurance and controls necessary to support their resolvability,” he said.