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Clearing risks in OTC derivatives markets: the CCP-bank nexus

Author

Listed:
  • Umar Faruqui
  • Wenqian Huang
  • Előd Takáts

Abstract

Systemically important banks and central counterparties (CCPs) interact in highly concentrated over-the-counter (OTC) derivatives markets. We outline the CCP-bank nexus to think about the endogenous interactions between banks and CCPs in periods of stress. As these interactions could potentially lead to destabilising feedback loops, the risks of banks and CCPs should be considered jointly, rather than in isolation.

Suggested Citation

  • Umar Faruqui & Wenqian Huang & Előd Takáts, 2018. "Clearing risks in OTC derivatives markets: the CCP-bank nexus," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:1812h
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    References listed on IDEAS

    as
    1. Stephen G Cecchetti & Jacob Gyntelberg & Marc Hollanders, 2009. "Central counterparties for over-the-counter derivatives," BIS Quarterly Review, Bank for International Settlements, September.
    2. David Murphy & Michalis Vasios & Nick Vause, 2014. "Financial Stability Paper No 29: An investigation into the procyclicality of risk-based initial margin models," Bank of England Financial Stability Papers 29, Bank of England.
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    6. Vincent Bignon & Guillaume Vuillemey, 2020. "The Failure of a Clearinghouse: Empirical Evidence [Counterparty risk externality: centralized versus over-the-counter markets]," Review of Finance, European Finance Association, vol. 24(1), pages 99-128.
    7. Dietrich Domanski & Leonardo Gambacorta & Cristina Picillo, 2015. "Central clearing: trends and current issues," BIS Quarterly Review, Bank for International Settlements, December.
    8. Shin, Hyun Song, 2010. "Risk and Liquidity," OUP Catalogue, Oxford University Press, number 9780199546367.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Tirupam Goel & Ulf Lewrick & Aakriti Mathur, 2021. "Does regulation only bite the less profitable? Evidence from the too-big-to-fail reforms," BIS Working Papers 922, Bank for International Settlements.
    2. van Binsbergen, Jules H. & Diamond, William F. & Grotteria, Marco, 2022. "Risk-free interest rates," Journal of Financial Economics, Elsevier, vol. 143(1), pages 1-29.
    3. Pauline Gandré & Mike Mariathasan & Ouarda Merrouche & Steven Ongena, 2024. "Unintended Consequences of the Global Derivatives Market Reform," Journal of the European Economic Association, European Economic Association, vol. 22(6), pages 2467-2506.
    4. Huang, Wenqian & Zhu, Haoxiang, 2024. "CCP auction design," Journal of Economic Theory, Elsevier, vol. 217(C).
    5. Wenqian Huang & Elöd Takáts, 2024. "Model Risk at Central Counterparties: Is Skin in the Game a Game Changer?," International Journal of Central Banking, International Journal of Central Banking, vol. 20(3), pages 161-184, July.
    6. Christian Kubitza & Loriana Pelizzon & Mila Getmansky Sherman, 2024. "Loss Sharing in Central Clearinghouses: Winners and Losers," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(2), pages 237-273.
    7. Dorinel Bastide & Stéphane Crépey & Samuel Drapeau & Mekonnen Tadese, 2022. "Derivatives Risks as Costs in a One-Period Network Model," Working Papers hal-03554577, HAL.
    8. Maximilian Jager & Frederick Zadow, 2023. "Clear(ed) Decision: The Effect of Central Clearing on Firms Financing Decision," CRC TR 224 Discussion Paper Series crctr224_2023_445, University of Bonn and University of Mannheim, Germany.
    9. Dorinel Bastide & Stéphane Crépey & Samuel Drapeau & Mekonnen Tadese, 2022. "Derivatives Risks as Costs in a One-Period Network Model," Post-Print hal-03910144, HAL.
    10. Thomas B. King & Travis D. Nesmith & Anna Paulson & Todd Prono, 2023. "Central Clearing and Systemic Liquidity Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 19(4), pages 85-142, October.
    11. Jin, YangKyu & Suh, Sangwon, 2024. "Procyclical variation margins in central clearing," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    12. Inaki Aldasoro & Wenqian Huang & Esti Kemp, 2020. "Cross-border links between banks and non-bank financial institutions," BIS Quarterly Review, Bank for International Settlements, September.
    13. Iñaki Aldasoro & Fernando Avalos & Wenqian Huang, 2023. "Liquid assets at CCPs and systemic liquidity risks," BIS Quarterly Review, Bank for International Settlements, December.
    14. Cucic, Dominic, 2022. "Central clearing and loss allocation rules," Journal of Financial Markets, Elsevier, vol. 59(PA).
    15. Cecchetti, Stephen & Berner, Richard & Schoenholtz, Kermit L., 2019. "Stress Testing Networks: The Case of Central Counterparties," CEPR Discussion Papers 13604, C.E.P.R. Discussion Papers.
    16. Soledad Núñez & Eva Valdeolivas, 2019. "Central clearing counterparties: benefits, costs and risks," Revista de Estabilidad Financiera, Banco de España, issue Spring.
    17. Melinda Friesz & Kira Muratov-Szabó & Andrea Prepuk & Kata Váradi, 2021. "Risk Mutualization in Central Clearing: An Answer to the Cross-Guarantee Phenomenon from the Financial Stability Viewpoint," Risks, MDPI, vol. 9(8), pages 1-19, August.
    18. Dorinel Bastide & St'ephane Cr'epey & Samuel Drapeau & Mekonnen Tadese, 2022. "Derivatives Risks as Costs in a One-Period Network Model," Papers 2202.03248, arXiv.org, revised Feb 2022.
    19. Soledad Núñez & Eva Valdeolivas, 2019. "Central clearing counterparties: benefits, costs and risks," Financial Stability Review, Banco de España, issue Spring.
    20. Gaetano Antinolfi & Francesca Carapella & Francesco Carli, 2019. "Transparency and Collateral: The Design of CCPs' Loss Allocation Rules," Finance and Economics Discussion Series 2019-058, Board of Governors of the Federal Reserve System (U.S.).
    21. Soledad Núñez & Eva Valdeolivas, 2019. "Central clearing counterparties: benefits, costs and risks," Financial Stability Review, Banco de España, issue Spring.

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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