Early Warning and Systemic Risk in Core Global Banking: Balance Sheet Financial Network and Market Price-Based Methods

Markose, Sheri M; Giansante, Simone; Eterovic, Nicolás A.; Gątkowski, Mateusz

doi:10.2139/ssrn.2899930

Cited by 1 publication

(1 citation statement)

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“…If the two sources mentioned above of the defaulting party are entirely exhausted, the use of the CCP's dedicated own resources, i.e., the junior tranch, takes precedence over the default fund contributions of non-defaulting members in the structure of the guarantee system. Therefore, the mutual sharing of losses and the default fund contributions by non-defaulting members are used only after the CCP's own funds (Markose et al, 2017). If all of these sources have run out and additional sources are needed, the next step is the senior tranch, the CCP's other financial resources.…”

Section: Figurementioning

confidence: 99%

The stress tests of central counterparties in the case of separate default funds - Planning the default fund and calculating its size

Friesz¹,

Muratov-Szabó²,

Prepuk³

et al. 2020

Economy & finance

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The crisis of 2008 pointed out the weaknesses of the current financial system. Since then, the role of central counterparties (CCP) has become increasingly important. CCPs provide guarantee, i.e., they take over the counterparty risk arising in the course of trading on different markets and guarantee the settlement of transactions. To fulfil this role, the CCP has to maintain financial resources which, in the event of the clearing member's default, are sufficient to cover the arising losses. For this purpose, the CCP operates a guarantee system, one element of this is the clearing members' contributions to the default fund. Our study focuses on the structure of the default fund operated by the CCP, as well as the stress test used for the calculation of the size of it. The results point out that we cannot rely solely on historical data when calculating the default fund. It is evident that excluding the outlier results, which are so-called "extreme but plausible," and building the default fund exclusively on historical data could be misleading, and the system could suffer unexpected and significant losses. Based on the risk mentioned above, hypothetical scenarios must be considered in the course of calculation so that the CCP can be prepared for unexpected losses.

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Section: Figurementioning

confidence: 99%