down immediately. in the event, the hong kong government and the clearing banks underpinned the clearing house. this episode warrants more study than it has received. had it been london, chicago or new york, it would have entered the folklore of policy memory. as with banks, public policy has to have two components. first, minimum standards to ensure that ccps do not fail. iosco / cpss are currently consulting on updated standards. ( my earlier remarks go to that. ) but second, a clear ex ante framework is needed for limiting disorder if, nevertheless, a ccp does in fact fail. i shall therefore close with a few preliminary thoughts on frameworks for handling the failure of a ccp. as with any business activity, if an institution is insolvent or otherwise cannot pay its debts, it has to stop trading, close and go into liquidation. that can be a disastrous course for a major financial institution at the very heart of important capital markets. policy in this general area revolves around building regimes that avoid taxpayer solvency support but are less disruptive than orthodox corporate liquidation. in the banking sphere, where a great deal of work is underway internationally, this is known as “ resolution ”. in the case of a distressed ccp, it is most likely that it would have been brought down by the failure of a very large clearing member and so would have unmatched positions as well as continuing matched positions. for the surviving clearing members, they would suddenly find themselves having unmatched positions, with continuing obligations to clients but a non - performing ccp on the other side. two strategies come to mind, which i am airing for debate. the first would be “ recapitalising ” the ccp so that it can carry on. the second would be to aim to bring off a more or less smooth unwinding of the ccp ’ s book of transactions. on the former route, in the banking sphere the basic strategy is to develop regimes for bondholders to share in the losses after the equity is wiped out ; a distressed bank gets “ recapitalised ” in some way through a reconstruction of its liabilities. but ccps do not issue debt, so there is not obviously an economic equivalent of recapitalisation by way of haircutting the debt claims of bondholders. recapitalisation would seem to entail an injection of new outside capital. that should not come from the public sector. so the only options are

below. the importance of the symmetry of the target is not well understood, but in the working of the committee it is hugely important. as central bankers, we would obviously like to do “ the prudent thing ”. and if the 2. 5 % target had been set as a ceiling, then it would be clearer, at times of doubt, or when the decision was finely balanced, what the right action to take on interest rates would be. but since the target is set at 2. 5 % on a symmetrical basis, the concept of “ prudence ” cannot be applied in the same way. the result is that we worry as much about being below the target as we do about being above it. and i believe this makes good economic sense : the problems of severe deflation are at least as great as severe inflation. the particular indexed measure of inflation the chancellor has chosen is rpix, that is the headline rpi number after excluding - this is the x bit - mortgage interest payments. some believe that we should move to the harmonised index of consumer prices ( hicp ), widely used in europe and, accordingly, making comparison with euroland inflation easier. hicp inflation in this country has been running consistently below rpix by about 1 %. this reflects differences in the construction of the index, in particular the treatment of depreciation of property costs. some have argued - most recently the engineering employers ’ federation - that if we moved to hicp, then interest rates could immediately be lowered. but this does not follow. if we moved to a different calculation of inflation, it would seem natural to revise the target at the same time. a 2. 5 % target for hicp would mean that we are targeting a higher level of inflation than we are at present. in any event, my view is that, as we seek to disseminate the benefits of low and stable inflation to as wide an audience as possible, consistency of the existing index and level is an advantage. critics of the process often argue that the mpc should have a second target ; most commonly industrialists argue that this should be an exchange rate target, seeking stability for sterling against our major trading partners. i well understand the difficulties that, in particular, exporters face given the volatile movements in exchange rates ; and the frustration is compounded by the difficulty in explaining such movements purely in terms of economic fundamentals. nevertheless it should be recognised that the recent historical experience of the uk in