The new CCP resolution template explained

Author: Gemma Varriale | Published: 7 Aug 2012

European Market Infrastructure Regulation (Emir) has regulators preoccupied with improving central counterparties (CCPs) systemic risk management. Iosco’s recent consultation and LCH Clearnet’s newly-launched clearing service could provide a CCP resolution template.

In a speech last October, Paul Tucker, deputy governor of the Bank of England sounded a clear warning to the market about the gap in the resolution regimes for CCPs. “What happens if they go bust?” said Tucker. “I can tell you the simple answer: mayhem. As bad as, conceivably worse than, the failure of large and complex banks.”

Under Emir, all standardised over the counter (OTC) derivative contracts should be traded on electronic trading platforms and cleared through CCPs. Although the requirement for centralised clearing of OTC derivatives may reduce the risks to counterparties of a default by one or more individual counterparties, it will also concentrate default risks in...