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Resolution of Failing Central Counterparties

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  • Duffie, Darrell

    (Stanford University)

Abstract

A central counterparty (CCP) is a financial market utility that lowers counterparty default risk on specified financial contracts by acting as a buyer to every seller, and as a seller to every buyer. When at risk of failure, a CCP could be forced into a normal insolvency process such as bankruptcy, or an administrative failure resolution process. This chapter reviews some alternative approaches to the design of insolvency and failure resolution regimes for CCPs. I focus on the allocation of losses and the question of whether and how to provide for continuity of clearing services. I discuss how one might adapt to CCPs some of the failure resolution approaches currently being designed for other forms of systemically important financial institutions. A key policy question is when to interrupt a contractually based CCP default management process with an overriding failure resolution process.

Suggested Citation

  • Duffie, Darrell, 2014. "Resolution of Failing Central Counterparties," Research Papers 3256, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3256
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    File URL: http://www.gsb.stanford.edu/faculty-research/working-papers/resolution-failing-central-counterparties
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    Cited by:

    1. Boissel, Charles & Derrien, François & Ors, Evren & Thesmar, David, 2017. "Systemic risk in clearing houses: Evidence from the European repo market," Journal of Financial Economics, Elsevier, vol. 125(3), pages 511-536.
    2. Heath, Alexandra & Kelly, Gerard & Manning, Mark & Markose, Sheri & Shaghaghi, Ali Rais, 2016. "CCPs and network stability in OTC derivatives markets," Journal of Financial Stability, Elsevier, vol. 27(C), pages 217-233.
    3. Bolton, Patrick & Oehmke, Martin, 2018. "Bank resolution and the structure of global banks," LSE Research Online Documents on Economics 118937, London School of Economics and Political Science, LSE Library.
    4. Yannick Armenti & Stéphane Crépey, 2017. "Central Clearing Valuation Adjustment," Working Papers hal-01169169, HAL.
    5. Patrick Bolton & Martin Oehmke, 2019. "Bank Resolution and the Structure of Global Banks," Review of Financial Studies, Society for Financial Studies, vol. 32(6), pages 2384-2421.
    6. Ricardo Mariño-Martínez & Carlos León & Carlos Cadena-Silva, 2020. "Las entidades de contrapartida central en la mitigación del riesgo de contraparte y de liquidez: El caso de los derivados cambiarios en Colombia," Borradores de Economia 1101, Banco de la Republica de Colombia.
    7. Bolton, Patrick & Oehmke, Martin, 2019. "Bank resolution and the structure of global banks," LSE Research Online Documents on Economics 90056, London School of Economics and Political Science, LSE Library.
    8. Christian Julliard & Gabor Pinter & Karamfil Todorov & Kathy Yuan, 2022. "What drives repo haircuts? Evidence from the UK market," BIS Working Papers 1027, Bank for International Settlements.
    9. Agostino Capponi & W. Allen Cheng & Sriram Rajan, 2015. "Systemic Risk: The Dynamics under Central Clearing," Working Papers 15-08, Office of Financial Research, US Department of the Treasury.
    10. Bolton, Patrick & Oehmke, Martin, 2018. "Bank Resolution and the Structure of Global Banks," CEPR Discussion Papers 13032, C.E.P.R. Discussion Papers.
    11. Inaki Aldasoro & Luitgard A M Veraart, 2022. "Systemic Risk in Markets with Multiple Central Counterparties," BIS Working Papers 1052, Bank for International Settlements.
    12. Dermot Turing & Mr. Manmohan Singh, 2018. "The Morning After--The Impact on Collateral Supply After a Major Default," IMF Working Papers 2018/228, International Monetary Fund.
    13. Yannick Armenti & St'ephane Cr'epey, 2015. "Central Clearing Valuation Adjustment," Papers 1506.08595, arXiv.org, revised Feb 2017.

    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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