BoE’s Sarah Breeden: CCPs must strengthen system-wide resilience

Central counterparties (CCPs) must adopt a system-wide view of risk to avoid amplifying financial stress, said Bank of England (BoE) Deputy Governor Sarah Breeden in a speech at the ISDA Annual General Meeting in Amsterdam. While CCPs play a crucial role in market resilience, Breeden warned that actions taken to protect themselves individually, particularly around margining, can have unintended consequences for the broader system.

Breeden pointed to margining as a key area where well-intentioned practices can backfire. “Margins play a vital role in managing risk,” she said, “but calling for more margin during stress can trigger liquidity strains.” Procyclical behaviour, where rising margins force asset sales and intensify price moves, was visible in the 2020 dash for cash, the 2022 commodity market turmoil, and the gilt market dysfunction later that year.

CCPs face what Breeden termed a “margining trilemma”, the trade-off between risk coverage, cost, and model reactivity. Regulatory requirements provide some constraints, but CCPs retain discretion, which supervisors are scrutinising closely. Feedback from clearing members and a clear understanding of potential liquidity needs are essential.

From models to markets

The Bank’s System-Wide Exploratory Scenario (SWES) revealed large gaps between margin projections from CCPs and their clearing members, highlighting the need for more transparent and predictable frameworks. International work is now converging on new standards to address these weaknesses, with domestic implementation set to begin this year.

Breeden also flagged risks from portfolio margining and cross-CCP exposures, which can increase systemic leverage. When market assumptions break down, such as correlation between assets, margin models may falter. “Conservative assumptions are key,” she said.

Operational resilience

Breeden closed by stressing the importance of CCPs’ operational resilience in an environment of rapid technological change and geopolitical uncertainty. “It’s not just about managing shocks, it’s about not amplifying them,” she said.

With the Financial Policy Committee set to explore reforms in gilt repo markets and continuing international work on non-bank leverage, Breeden called for shared responsibility across the system to ensure true financial stability.