In addition, international standards on margin requirements for non-centrally cleared derivatives have been adopted.3 By definition, bespoke derivatives cannot be centrally cleared and so do not benefit from the risk reduction and enhanced transparency associated with central clearing. To offset this, these derivatives will be required by regulation to have higher initial margin requirements, as well as variation margin. Despite these efforts, we still may not get the balance right in terms of the requirements applied to non-standard versus standardized, cleared contracts. One worry is that CCPs that are shareholder-owned and operated for profit may compete for market share by offering lower margin requirements on standardized products. This could strike the wrong balance between the private profit motive versus the public benefit of clearing. For this reason, I believe that all CCPs need to have strong governance and regulatory oversight. This must be harmonized on an international basis in order to prevent a potential race to the bottom. It is important to recognize that increased use of CCPs for central clearing also creates potential financial stability issues that must be addressed. While CCPs reduce aggregate risk, they also concentrate the remaining risk. That is, CCPs create potential single points of failure in global derivatives markets. CCPs need adequate capacity to absorb potential losses from the default of one or more of its members, and they need to have access to liquidity so that they can always fully settle their obligations.

In addition to providing additional loss absorbing capacity, this capital buffer requirement will act to offset any funding advantages for G-SIFIs, helping to level the playing field with smaller, less complex financial institutions. Together, when fully implemented, these changes should reduce the failure risk for G-SIFIs. To complement the Basel framework, I believe that jurisdictions need to create processes and incentives for management of G-SIFIs to act earlier and more decisively in response to emerging risks facing their firms. Proactive interventions by the senior management of banks will have a greater efficacy and a lower cost than reactive steps taken only in response to growing market pressure. These proactive management interventions can take many forms 2  BIS central bankers’ speeches  including raising additional capital, cutting capital distributions, restructuring business lines and making difficult personnel changes. Avoiding a hazard is easier if one’s focal point is kept well down the road. Official sector stress tests are an important tool that can facilitate this forward-looking management focus. One example is the Comprehensive Capital Analysis and Review (CCAR) process in the United States. The goal of CCAR is to ensure that banks have robust, forward-looking capital planning processes, as well as sufficient capital to withstand severely stressed economic conditions while, maintaining their ability to perform their critical roles of credit intermediation. In CCAR, each of the participating banks is required to project the impact of particular forward-looking stress scenarios on their operations over a two-year horizon.