instead a qualitative judgement about the credibility and feasibility of the different types of resources of a ccp to absorb loss and replenish its going concern requirements. ccps have different liability structures from banks and therefore the assessment of the absorbency of these structures and the appropriateness of additional forms of lac is more likely to be different from banks than it is to be the same. that assessment of lac will need to consider the extent to which unfunded commitments from members can be relied upon given the procyclicality of calling for them in stressed circumstances. it means assessing the credibility of allocating losses via cash calls or variation margin haircutting and the incentives that this generates in clearing members and clients to continue to clear through the ccp. and it also means looking not just at loss absorbency for clearing member default but also at the ccp ’ s capacity to absorb losses and recapitalise where a loss springs from operational or other losses not covered in full by loss allocation arrangements with its members. point of entry to resolution one issue that is necessarily intertwined with the question of resources is the point of entry into resolution. as i have described, resolution is a financial reconstruction. for it to be effective it cannot be exercised only once the financial resources in a firm have already been exhausted. if it is decided that the resources available for resolution lie principally within the existing waterfall, that would further suggest that resolution authorities must have the ability to intervene and to take action before the end of the waterfall. but where does that boundary lie? the uk resolution regime sets the statutory definition for entry to resolution as being the point where the ccp is failing or likely to fail and there is no reasonable prospect of action being taken to restore it to viability. integral to this test is the principle that this is a forward - looking judgement, capable of being exercised flexibly at different points in a ccp ’ s distress and dependent on a multitude of factors that drive an eventual decision at the time. that can make it difficult to pin down a single universal trigger point but it is possible to identify some circumstances that could be indicative of this boundary being reached. those possible scenarios could include an assessment that the default management procedures of the ccp have failed, or are likely to fail, to both absorb losses fully and replenish the ccp ’ s resources in a sufficiently timely manner to allow the ccp to continue to operate. that failure might arise through legal challenge hindering the default management

ratings. they are therefore more dependent on rating agencies. in addition, investors ’ trust in the rating process may have been encouraged by the regulatory and prudential system, which uses ratings as a basis for steering the investment strategies and decisions of the institutions in charge of collecting public savings. the second source of misunderstanding stems from the metric used for rating structured products. it is identical, in terms of presentation, to that used for traditional bond products. yet, the two universes are different. the consequences of assigning a aaa rating to a cdo and to a corporate bond are not the same. the risk profile is different. the potential volatility of a aaa rating for a structured product, in particular, is far greater than that for a traditional product ( for a shock, all other things are equal, of the same magnitude ). structured products are built on correlations and leverage. if one of the riskier tranches is affected by a default, the value ( and the rating ) of the other tranches will also be affected by contagion, through the decrease in their subordination level. of all asset classes, cdos are those whose rating is the least stable over time. to give just one extreme example, a aaa - rated cpdo was recently downgraded by nine notches in one day. for investors, a aaa rating has traditionally been associated with a stable investment. it is now evident that there are stable aaas and less stable aaas, which considerably reduces the clarity of ratings. it would have been simpler to adopt a specific metric for structured products and, by doing so, many misunderstandings that were responsible for the current turmoil could have been avoided. avenues for the future hopefully these thoughts will open up some avenues for the future. i believe that there are two symmetrical pitfalls to be avoided. the first would be to continue as before, with a few minor changes to the existing system. the turmoil observed over the past three months, and its potential impact on the real economy, are too important. furthermore, the rating process will inevitably play a key role in the implementation of basel ii. this will involve a more refined assessment of risk, in particular through the promotion of internal models, and greater use of external ratings. the second mistake would be to rush into the regulation of rating agencies. we cannot rule out that, at some stage, such regulation may become necessary. after all, information is a public good and rating agencies are the providers of