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Central Counterparty Exposure in Stressed Markets

Author

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  • Wenqian Huang

    (Bank for International Settlements, 4051 Basel, Switzerland)

  • Albert J. Menkveld

    (School of Business and Economics, Vrije Universiteit Amsterdam, 1081 HV Amsterdam, Netherlands; Tinbergen Institute, 1082 MS Amsterdam, Netherlands)

  • Shihao Yu

    (School of Business and Economics, Vrije Universiteit Amsterdam, 1081 HV Amsterdam, Netherlands)

Abstract

Time is valuable, particularly in stressed markets. Because central counterparties (CCPs) have become systemically important, we need to understand the dynamics of their exposure toward clearing members at high frequencies. We track such exposure and decompose it, yielding the following insights. The composition of CCP exposure is fundamentally different in the tails. At extreme levels or during rapid increases, there is elevated crowding. This is the result of clearing members all concentrating their positions on a single security or a particular portfolio, which is desirable if motivated by hedging but worrying if due to speculation.

Suggested Citation

  • Wenqian Huang & Albert J. Menkveld & Shihao Yu, 2021. "Central Counterparty Exposure in Stressed Markets," Management Science, INFORMS, vol. 67(6), pages 3596-3617, June.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:6:p:3596-3617
    DOI: 10.1287/mnsc.2020.3601
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    More about this item

    Keywords

    central counterparties (CCPs); crowding risk; market stress;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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