IDEAS home Printed from https://ideas.repec.org/a/bis/bisqtr/1812h.html
   My bibliography  Save this article

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
    as

    Download full text from publisher

    File URL: http://www.bis.org/publ/qtrpdf/r_qt1812h.pdf
    Download Restriction: no
    File URL: http://www.bis.org/publ/qtrpdf/r_qt1812h.htm
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Stephen G Cecchetti & Jacob Gyntelberg & Marc Hollanders, 2009. "Central counterparties for over-the-counter derivatives," BIS Quarterly Review, Bank for International Settlements, September.
    3. Dietrich Domanski & Leonardo Gambacorta & Cristina Picillo, 2015. "Central clearing: trends and current issues," BIS Quarterly Review, Bank for International Settlements, December.
    4. Murphy, David & Vasios, Michalis & Vause, Nick, 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.
    5. Stephen Morris & Hyun Song Shin, 2008. "Financial Regulation in a System Context," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 229-274.
    6. Shin, Hyun Song, 2010. "Risk and Liquidity," OUP Catalogue, Oxford University Press, number 9780199546367.
    7. Iñaki Aldasoro & Torsten Ehlers, 2018. "The credit default swap market: what a difference a decade makes," BIS Quarterly Review, Bank for International Settlements, June.
    8. Xavier Freixas & Jean-Charles Rochet & Bruno M. Parigi, 2004. "The Lender of Last Resort: A Twenty-First Century Approach," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1085-1115, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. Ongena, Steven & Gandré, Pauline & Mariathasan, Mike & Merrouche, Ouarda, 2020. "Unintended Consequences Of The Global Derivatives Market Reform," CEPR Discussion Papers 14802, C.E.P.R. Discussion Papers.
    4. Wenqian Huang & Előd Takáts, 2020. "Model risk at central counterparties: Is skin-in-the-game a game changer?," BIS Working Papers 866, Bank for International Settlements.
    5. Dorinel Bastide & Stéphane Crépey & Samuel Drapeau & Mekonnen Tadese, 2022. "Derivatives Risks as Costs in a One-Period Network Model," Working Papers hal-03554577, HAL.
    6. Christian Kubitza & Loriana Pelizzon & Mila Getmansky Sherman, 2021. "Loss Sharing in Central Clearinghouses: Winners and Losers," ECONtribute Discussion Papers Series 066, University of Bonn and University of Cologne, Germany.
    7. 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.
    8. Dorinel Bastide & Stéphane Crépey & Samuel Drapeau & Mekonnen Tadese, 2022. "Derivatives Risks as Costs in a One-Period Network Model," Post-Print hal-03910144, HAL.
    9. 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.
    10. Iñaki Aldasoro & Wenqian Huang & Esti Kemp, 2020. "Cross-border links between banks and non-bank financial institutions," BIS Quarterly Review, Bank for International Settlements, September.
    11. Iñaki Aldasoro & Fernando Avalos & Wenqian Huang, 2023. "Liquid assets at CCPs and systemic liquidity risks," BIS Quarterly Review, Bank for International Settlements, December.
    12. G. Thomas Kingsley & Travis D. Nesmith & Anna L. Paulson & Todd Prono, 2019. "Central Clearing and Systemic Liquidity Risk," Working Paper Series WP 2019-12, Federal Reserve Bank of Chicago.
    13. Cucic, Dominic, 2022. "Central clearing and loss allocation rules," Journal of Financial Markets, Elsevier, vol. 59(PA).
    14. 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.
    15. Soledad Núñez & Eva Valdeolivas, 2019. "Central clearing counterparties: benefits, costs and risks," Revista de Estabilidad Financiera, Banco de España, issue Spring.
    16. 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.
    17. 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.
    18. Soledad Núñez & Eva Valdeolivas, 2019. "Central clearing counterparties: benefits, costs and risks," Financial Stability Review, Banco de España, issue MAY.
    19. 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.).
    20. Wenqian Huang & Haoxiang Zhu, 2021. "CCP Auction Design," BIS Working Papers 938, Bank for International Settlements.
    21. Soledad Núñez & Eva Valdeolivas, 2019. "Central clearing counterparties: benefits, costs and risks," Financial Stability Review, Banco de España, issue Spring.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. G. Thomas Kingsley & Travis D. Nesmith & Anna L. Paulson & Todd Prono, 2019. "Central Clearing and Systemic Liquidity Risk," Working Paper Series WP 2019-12, Federal Reserve Bank of Chicago.
    2. 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.
    3. 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.
    4. Jaremski, Matthew, 2018. "The (dis)advantages of clearinghouses before the Fed," Journal of Financial Economics, Elsevier, vol. 127(3), pages 435-458.
    5. Hyun Song Shin, 2014. "Adapting Macroprudential Policies to Global Liquidity Conditions," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 2, pages 25-67, Central Bank of Chile.
    6. Injun Hwang & Baeho Kim, 2022. "A systemic change of measure from central clearing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(9), pages 1738-1754, September.
    7. Nikil Chande & Nicholas Labelle, 2016. "Using Speed and Credit Limits to Address the Procyclicality of Initial Margin at Central Counterparties," Discussion Papers 16-18, Bank of Canada.
    8. Hyun Song Shin & Kwanho Shin, 2011. "Procyclicality and Monetary Aggregates," NBER Working Papers 16836, National Bureau of Economic Research, Inc.
    9. Cecchetti, Stephen & Schoenholtz, Kermit L., 2017. "Regulatory Reform: A Scorecard," CEPR Discussion Papers 12465, C.E.P.R. Discussion Papers.
    10. Hitoshi Hayakawa, 2018. "Does a central clearing counterparty reduce liquidity needs?," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(1), pages 9-50, April.
    11. Carapella, Francesca & Monnet, Cyril, 2020. "Dealers’ insurance, market structure, and liquidity," Journal of Financial Economics, Elsevier, vol. 138(3), pages 725-753.
    12. Dávid Zoltán Szabó & Kata Váradi, 2022. "Margin requirements based on a stochastic correlation model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(10), pages 1797-1820, October.
    13. Dietrich Domanski & Leonardo Gambacorta & Cristina Picillo, 2015. "Central clearing: trends and current issues," BIS Quarterly Review, Bank for International Settlements, December.
    14. Paul Glasserman & Qi Wu, 2018. "Persistence and Procyclicality in Margin Requirements," Management Science, INFORMS, vol. 64(12), pages 5705-5724, December.
    15. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediaries, financial stability and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 287-334.
    16. Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    17. Wenqian Huang, 2019. "Central counterparty capitalization and misaligned incentives," BIS Working Papers 767, Bank for International Settlements.
    18. Baranova, Yuliya & Liu, Zijun & Noss, Joseph, 2016. "The role of collateral in supporting liquidity," Bank of England working papers 609, Bank of England.
    19. Laura Jaramillo & Miss Anke Weber, 2013. "Global Spillovers into Domestic Bond Markets in Emerging Market Economies," IMF Working Papers 2013/264, International Monetary Fund.
    20. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 261-282, October.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bis:bisqtr:1812h. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Beslmeisl (email available below). General contact details of provider: https://edirc.repec.org/data/bisssch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.