The Trillion Dollar Question: Can a Central Bank Bail-Out a Central Counterparty (CCP) Clearing House Which is 'Too Big to Fail'?

6 Brooklyn Journal of Corporate, Financial & Commercial Law 433, 2012

54 Pages Posted: 25 Jan 2012 Last revised: 19 Jan 2017

Date Written: January 10, 2012

Abstract

Central Counterparty (CCP) clearing houses should have a well-drafted set of default procedures in their clearing rules. The default procedures outline the 'waterfall' of financial resources that a CCP has at its disposal to cover any losses arising from the default of a clearing member. However, if there are insufficient financial resources, a CCP may become insolvent. The question being debated by policy-makers around the globe is whether a central bank can act as the 'lender of last resort' (LOLR) or provide 'emergency liquidity assistance' (ELA) to a systemically important CCP that has become insolvent and is considered 'too big to fail.' CCPs have rarely failed in the past: they have demonstrated that they have adequate risk management and default procedures. Nevertheless, it is argued in this article that central banks must have a 'discretionary' legal power to bail-out CCPs which are too big to fail. CCPs could become insolvent due to unforeseen circumstances, such as operational risks. This article considers the law in the US, Canada, the Euro-zone (France and Germany), Sweden, and the UK. It also considers whether a CCP that clears credit default swaps (CDS) should receive emergency liquidity assistance.

Suggested Citation

Chamorro-Courtland, Christian, The Trillion Dollar Question: Can a Central Bank Bail-Out a Central Counterparty (CCP) Clearing House Which is 'Too Big to Fail'? (January 10, 2012). 6 Brooklyn Journal of Corporate, Financial & Commercial Law 433, 2012, Available at SSRN: https://ssrn.com/abstract=1991295

Christian Chamorro-Courtland (Contact Author)

University of Dubai ( email )

AL MAKTOOM STREET
Dubai, 14143
United Arab Emirates

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