40 % respectively in 2008. 3 this brought greater stability to derivative markets by ensuring that if a major financial institution were to collapse, you needn ’ t worry about a domino effect – with the failing firm ’ s derivatives contracts potentially threatening the viability of any number of other firms. 4 ben bernanke, op - ed at brookings institution, 13 september 2018 g20 leaders ’ statement pittsburgh summit, september 2009. bank of international settlements statistical release, november 2020 although it ’ s not my focus today, reforms to bilateral derivatives trading have also helped to reduce the chance that bilateral contracts fuel a panic. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice one of the key ways central clearing counterparties – ccps – help prevent panic is to be sure that as markets move, firms quickly pay for changes to their derivatives contracts, and insure against likely further changes. first, when derivatives contracts change value, the holders of those contracts exchange money right away. losses and gains are promptly allocated to the firms on either side of the trade. this limits the chance that, if one side of the trade defaults, the other firm is left holding the bag for the defaulter ’ s bad trades. this is called variation margin. second, ccps require firms to place pre - paid self - insurance with the ccp to cover the predicted liquidation costs in the event of their default. because derivatives markets can be fast moving, a key factor in how large this self - insurance needs to be is how volatile the markets are. this is known as initial margin. importantly in times of market turbulence, both losses and gains of individual participants and required pre - paid self - insurance will rise. they are inherently pro - cyclical. as deputy governor jon cunliffe said last summer, this is a feature, not a bug. 5 so did the simpler, post 2008 - system work? in march and april 2020, we saw some of the biggest two - day price moves for some cleared products in the past decade. in a number of products the price moves were much larger than ever seen before. there were no major clearing member defaults during the pandemic, so clearing was not tested to the limit. but uk ccps were able to provide clearing services without disruption. and, importantly, despite record market moves, uk ccps had enough prepositioned resources throughout the episode to cover the speech

the increase in margin is only one piece of the puzzle. what matters is that the system as a whole has the right level of liquidity to cope with volatility in derivatives markets in a stress and that liquidity is in the right place we need to understand which market participants were caught flat - footed and why. thanks to post - 2008 liquidity reforms, banks seemed able to handle the liquidity pressures they faced in march, including from margin calls. but non - banks such insurers, pension funds, hedge funds and asset managers have grown in importance over the past decade - we need to examine how well prepared they were to face the liquidity demands around margins. it ’ s too early to reach policy conclusions. but to preview the options in front of us : it ’ s possible we ’ ll want to explore solutions that could reduce the need for ccp margin to rise as much in stress by pre - positioning more liquidity at ccps during quiet periods. it ’ s possible we could accomplish this by spreading existing good practices in ccp model design. it ’ s equally possible we ’ ll want to focus on better liquidity risk management, particularly for non - banks. this could make sure market participants self - insure against margin calls on their own balance sheets – rather than pre - positioning initial margin at the ccp. improving transparency around potential margin calls could help support this. it ’ s possible that we ’ ll want to do some of both. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice the right balance of policy responses will depend on what evidence we find. to be clear, the question here is not about whether ccp margin is to “ blame ” for the dash - for - cash. the question is did the system have enough liquidity ready in the right places to respond to derivative market volatility without adverse consequences for financial stability. whatever we conclude, our policy response will need to take into account the whole story - including the essential role that margin played in preventing panic. we don ’ t want to return to the pre - lehman world of a spaghetti bowl of counterparty credit risk. 4. conclusion so going back to my original questions. first, what has the experience of march and april told us about the reforms we put in place post - 2008 to make the global financial system simpler? a : the headline answer is : it worked. when it comes