Clearinghouse Margin Requirements

Capponi, Agostino; Cheng, W. Allen

doi:10.1287/opre.2018.1742

Cited by 15 publications

(9 citation statements)

References 17 publications

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“…In practice both approaches may be used by a CCP depending on the products cleared. Most empirical articles in the literature focus on the first approach (Capponi & Cheng, 2018;Ghamami, 2015) often with a recommendation to include in the margin calculations a specific issue or technique. Examples are wrong-way risks (Brigo & Pallavicini, 2014), crowded trades (Menkveld, 2017), default risk among clearing members within the same financial group (Cruz Lopez et al, 2011, and filtered historical simulation (Barone-Adesi et al, 2018).…”

Section: Are the Resources Of A Ccp Sufficient?mentioning

confidence: 99%

Fundamental questions on central counterparties: A review of the literature

Berndsen

2021

Journal of Futures Markets

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Central counterparties (CCPs) function as financial infrastructures for capital markets in derivatives. They are designed to reduce aggregate counterparty credit risk. Although CCPs have existed for well over a century, they have only gained prominence after the Great Financial Crisis compelled the G20 to implement the mandatory clearing policy to make over-the-counter derivative transactions safer. This has led to a boom in CCP literature, 60% of which has been published in the last 5 years. This article provides a review of the literature on derivative CCPs focusing on some fundamental topics regarding the raison d'être, resilience, and governance of the CCP.

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Section: Are the Resources Of A Ccp Sufficient?mentioning

confidence: 99%

Fundamental questions on central counterparties: A review of the literature

Berndsen

2021

Journal of Futures Markets

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“…Of crucial importance is how the CCP sets margin requirements. Capponi and Cheng (2018) examine the tension between setting member fees and collateral levels and how, if made effectively, these choices limit contagion from portfolio shocks. Various empirical studies examine how CCPs set margin levels in practice (Duffie et al (2015); Capponi et al (2017)).…”

Section: Related Literaturementioning

confidence: 99%

Contagion in Derivatives Markets

2020

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A major credit shock can induce large intraday variation margin payments between counterparties in derivatives markets, which may force some participants to default on their payments. These payment shortfalls become amplified as they cascade through the network of exposures. Using detailed Depository Trust & Clearing Corporation data, we model the full network of exposures, shock-induced payments, initial margin collected, and liquidity buffers for about 900 firms operating in the U.S. credit default swaps market. We estimate the total amount of contagion, the marginal contribution of each firm to contagion, and the number of defaulting firms for a systemic shock to credit spreads. A novel feature of the model is that it allows for a range of behavioral responses to balance sheet stress, including delayed or partial payments. The model provides a framework for analyzing the relative effectiveness of different policy options, such as increasing margin requirements or mandating greater liquidity reserves. This paper was accepted by Karl Diether, finance.

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“…In each of the four considered cases, the FVA becomes preponderant and even hegemonic (as it tends to infinity) when a goes to 100%. Capponi and Cheng (2016) construct a model which endogenizes collateral, making it part of an optimization problem where the CCP maximizes profit by controlling collateral and fee levels. They conclude that the collateral level should decrease with funding costs, on top of increasing with market volatility.…”

Section: Impact Of the Liquidation Periodmentioning

confidence: 99%

Central Clearing Valuation Adjustment

Armenti¹,

Crépey²

2017

SIAM J. Finan. Math.

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We develop an XVA (costs) analysis of the clearance framework for a member of a clearing house. The systemic consequences of the default of the clearing house itself are outside the scope of such an XVA analysis. Hence the clearing house is assumed default-free. We introduce a dynamic framework that incorporates the sequence of cash flows involved in the waterfall of resources of a clearing house. The overall XVA cost for a member, dubbed CCVA for central clearing valuation adjustment, is decomposed into CVA, MVA and KVA components. The CVA is the cost for a member of its losses on the default fund due to the defaults of other members. The MVA is the cost of funding initial margin. The KVA mainly consists in the cost of the capital at risk that the member provides to the CCP through its default fund contribution. In the end the structure of the XVA equations for bilateral and cleared portfolios is similar, but the data of the equations are of course not the same, reflecting the different financial network structures. The numerical experiments emphasize the multilateral netting benefit of central clearing. However, it is known that this multilateral netting comes at the expense of a loss of netting across asset classes. If we compensate the first order multilateral netting effect by a suitable scaling factor accounting for the loss of netting across asset classes, then the bilateral and centrally cleared XVA numbers become comparable. The second more explanatory factor of the numerical results is the credit risk of the members and the ensuing MVA, especially in the bilateral setup, where even more initial margin is required.

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Clearinghouse Margin Requirements

Cited by 15 publications

References 17 publications

Fundamental questions on central counterparties: A review of the literature

Fundamental questions on central counterparties: A review of the literature

Contagion in Derivatives Markets

Central Clearing Valuation Adjustment

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