Central counterparties in financial difficulties Failure of a CCP
UK CCPs must calibrate their IM and default fund requirements such that they are large enough to cover the losses resulting from the default of two of their largest clearing members. If a default loss exceeds this amount, the CCP has recourse to a number of tools and powers in its rulebook, which sets out the contractual agreements the CCP has with its clearing members, to mitigate against the loss. If a CCP began to experience a deterioration in its financial situation as a result of clearing member default, the CCP would use these tools to stop it from failing. These are known as "recovery actions". If the CCP is unable to cover the loss using these recovery actions, it may have to close the clearing service and allocate outstanding losses to clearing members.
	The continuity of critical clearing services may also be threatened as a result of the CCP experiencing a loss which arises not as a result of a clearing member default (e.g. as a result of a cyber-attack). This is known as a "non-default loss".
	The closure of a CCP’s critical clearing services, either because of a default loss or non-default loss scenario, would constitute the failure of a CCP. Typically, when a financial institution fails, it would be subject to normal or modified insolvency proceedings. In the case of CCPs, due to their systemic importance, this approach would be likely to have a significant negative impact on financial stability, disrupting the provision of critical clearing and settlement functions to the economy, and having severe knock-on effects on other market participants. The failure of a CCP could cause considerable disruption to the markets it serves, with these markets potentially needing to close, which could expose market participants to significant losses. The scale of the losses and impact on financial markets could be similar to that of a financial system-wide crisis, or even cause such a crisis. The failure of a CCP could therefore undermine the stability of the entire financial system.
	Given this, the use of normal or modified insolvency procedures are generally not considered appropriate for managing the failure of a CCP, and alternative arrangements are needed.