In CCP we trust … or do we? Assessing the regulation of central clearing counterparties in Europe

Nabilou, Hossein; Asimakopoulos, Ioannis

doi:10.1093/cmlj/kmz026

Cited by 2 publications

(4 citation statements)

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“…However, this concentration of transaction risk necessitated the development of CCP regulation. The regulatory framework of the United States' clearing activity was established relatively late, in 2010, the so-called Dodd-Frank Act, which EMIR followed in 2012, the jurisdiction applicable in the European Union (Nabilou and Asimakopoulos, 2020).…”

Section: Cpss-iosco 2012mentioning

confidence: 99%

“…Every clearing member is obligated to contribute to it based on risk-based and pro-rata. The resilience is ensured by the requirements of EMIR, stipulating that the fund must be flexible enough to withstand the most extensive exposures of the highest or the sum of the second and third largest members' exposure (Nabilou and Asimakopoulos, 2020).…”

Section: Emirmentioning

confidence: 99%

“…Article 50 (1) of EMIR ( 2012) also gives a tool to mitigate potential counterparty risk to the extent possible, so a CCP should use central bank money for settling its transactions or by using appropriate measures to limit its cash settlement risks, it can use other resources as well. Nabilou and Asimakopoulos (2020) consider that the need for liquidity is more relevant in providing clearing services by non-bank CCPs, or CCPs not affiliated with banks. Firstly, intraday funding needs are the primary risks to ensure arising daily payment obligations.…”

Section: Emirmentioning

confidence: 99%

“…In the case of CCPs, the contagion of default is the most significant risk that may trigger a whole system's default. While in the case of banks, this is unlikely since the bank resolution allows banks to be resolved without bailing in certain liabilities that could generate contagion, but such liabilities could be the banks' obligations to CCPs Nabilou and Asimakopoulos (2020). point out a study that shows the concerns regarding interdependencies among CCPs, which may increase the probability of systemic failure.…”

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confidence: 99%

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Central Counterparties : Risk management of central counterparties focusing on the analysis of stress tests

Friesz¹

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My thesis focuses on central counterparties (CCPs) and the stress tests they perform to achieve a resistant operation and therefore increase market resilience. CCPs’ role is to take over the counterparty risk during trading. A CCP needs to operate a multi-level guarantee system that can absorb losses of clearing members’ defaults to fulfill its role. One of the main focal points of my research is to analyze how the size of the guarantee system changes and how the cross-guarantee undertaking changes between clearing members and markets if the CCP merges the guarantee systems of different markets. This question is essential from a financial stability perspective since the guarantee system’s size and structure will affect the loss-absorbing capacity of a CCP. Monte Carlo simulation was used to simulate a 30 years time series for three different products, which gave the basis for the Value-at-Risk-based margin calculation and the stress test-based default fund calculation. Results show that merging the guarantee systems will always decrease the total value of the guarantees because the margin will decrease, which cannot be offset by the increase in the default fund size. In conclusion, it is not optimal from the financial stability perspective to merge the guarantee systems. However, merging is more suitable if the CCP wants to provide cheaper services or if the clearing members are willing to cross-guarantee each other. In order to increase efficiency and to analyze and align the incentives of the CCP and its clearing members, I decided to use the model presented above to shows how the CCP’s own contribution in the default waterfall is affected in different market structures. The model needed to be simplified to perform a sensitivity test on the skin-in-the-game. Overall, the model is improved, and all three layers of the default waterfall are part of the stress testing, so results are based on the whole default waterfall rather than just a part of it and therefore reached more sophisticated conclusions. The proposed model shows how the CCP’s own contribution in the default waterfall is affected in different structures. It is an important question since this own contribution is being financed from the capital of the CCP. So the larger this contribution is, the larger the stake of the CCPs’ capital is risked. Results for the four different operations are as follows: • The merged market scenario is risky for the CCP since it offers the lowest value for the overall default waterfall, and also, the CCP has to provide the second largest SITG value compared to the fully or partially separated - IM structures. This setup is favorable for some members engaging in risky trading and also affects clearing members’ liquidity the least. In the long run, the CCP would need a tremendous amount of capital to support the system, mainly if it aims to protect non-defaulting members. However, to avoid resolution, the CCP relies on the fund provided by the non-defaulting members. Due to the heightened level of loss-mutualization, this setup is disadvantageous for members active only on one of the cleared markets. • The separated design gives an advantage to the CCP, but it is not beneficial for minor participants from the market because the clearing activity can become too costly. • The default fund level separation setup was the least favorable since it required the highest SITG, while the members had a higher default fund contribution obligation. • The partially separated - IM one was proven to be the most suitable for all stakeholders. It brings the benefits of a higher margin requirement and smaller SITG for the CCP, but members can profit from hedging and risk-mutualization on a default fund level, ultimately, this being the best compromise between parties.

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Section: Cpss-iosco 2012mentioning

confidence: 99%

Section: Emirmentioning

confidence: 99%

Section: Emirmentioning

confidence: 99%

mentioning

confidence: 99%

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Central Counterparties : Risk management of central counterparties focusing on the analysis of stress tests

Friesz¹

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At the End of the Waterfall – Resolvability of Central Counterparties

Gárdos¹

2021

CCM

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After the prudential requirements introduced by EMIR in 2012, the European Union took a further step when it adopted a regulation in 2021 on the framework for the recovery and resolution of central counterparties. The regulation is based on the bank recovery and resolution directive of 2014. This paper provides a critical overview of the new regulation by focusing on the question of whether the bank resolution tools are useful and effective in the case of central counterparty resolutions.

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In CCP we trust … or do we? Assessing the regulation of central clearing counterparties in Europe

Cited by 2 publications

References 11 publications

Central Counterparties : Risk management of central counterparties focusing on the analysis of stress tests

Central Counterparties : Risk management of central counterparties focusing on the analysis of stress tests

At the End of the Waterfall – Resolvability of Central Counterparties

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