Paul Tucker, deputy governor of the Bank of England, says effective resolution regimes need to be put in place to help deal with the "mayhem" that would result if a central counterparty went bust.
In a speech at a Brussels Conference, Tucker warned: "There is a big gap in the regimes for CCPs - what happens if they go bust? I can tell you the simple answer: mayhem. As bad as, conceivably worse than, the failure of large and complex banks."
This means that an effective resolutions regime needs to be put in place. "Orderly resolution is what is needed when a CCP is bankrupt, when we all need somehow to avoid the chaos that follows a standard liquidation of assets and closing out of positions".
It is vital, says Tucker, that any losses are not picked up by the taxpayer, with the burden instead falling on clearing members, as they would be the principal creditors in an insolvent liquidation.
Tucker also used the speech to call for risk managers at central counterparties to be at the heart of the organisation with a "a clear and independent line to the group board, so that they cannot be lent on by the affiliated exchange to reduce or shade initial margin requirements or collateral terms or portfolio investment policies in order to generate more turnover".
In the same spirit, the core risk management functions of CCPs should not be outsourced, he warned.
Meanwhile, Tucker says the EU must ensure that requirements to clear through CCPs apply to exchange-traded derivatives and to vital cash markets, not just to 'standardized' OTC derivatives.
"Whatever anyone says, there is really no excuse for where things currently stand on this in Europe. The MiFID II package provides an opportunity to correct it next year. Those who argue that the gap in the EU's framework should persist are serious about private gain but, sadly, not about stability. The crisis that threatens to engulf us all illustrates why we should give no room to such sentiments."