Optimal Central Counterparty Risk Management
AbstractIn order to protect themselves against the potential losses in case of a participant's default and to contain systemic risk, central counterparties (CCPs) need to maintain sufficient financial resources. Typically, these financial resources consist of margin requirements and contributions to a collective default fund. Based on a stylized model of CCP risk management, this article analyzes the main factors affecting the trade-off between margins and default fund. The optimal balance between these two risk management instruments is found to depend on collateral costs, participants' default probability, and the extent to which margin requirements are associated with risk-mitigating incentives. Given the increasing role of CCPs in financial markets in general and for financial stability in particular, these considerations are not only important for CCPs themselves, but also for financial regulators.
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Bibliographic InfoPaper provided by Swiss National Bank in its series Working Papers with number 2009-07.
Length: 28 pages
Date of creation: 2009
Date of revision:
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Central counterparty; margin requirements; default fund; financial stability; incentives;
Find related papers by JEL classification:
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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- Siyi Zhu, 2011. "Is there a 'race to the bottom' in central counterparties competition?," DNB Occasional Studies 906, Netherlands Central Bank, Research Department.
- Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012. "When Lower Risk Increases Profit: Competition and Control of a Central Counterparty," Working Papers 12-35, Bank of Canada.
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