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Capital Requirements for Over-the-Counter Derivatives Central Counterparties

Author

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  • Li Lin
  • Jay Surti

Abstract

The central counterparties dominating the market for the clearing of over-the-counter interest rate and credit derivatives are globally systemic. Employing methodologies similar to the calculation of banks’ capital requirements against trading book exposures, this paper assesses the sensitivity of central counterparties’ required risk buffers, or capital requirements, to a range of model inputs. We find them to be highly sensitive to whether key model parameters are calibrated on a point-in-time versus stress-period basis, whether the risk tolerance metric adequately captures tail events, and the ability—or lack thereof—to define exposures on the basis of netting sets spanning multiple risk factors. Our results suggest that there are considerable benefits from having prudential authorities adopt a more prescriptive approach to for central counterparties’ risk buffers, in line with recent enhancements to the capital regime for banks.

Suggested Citation

  • Li Lin & Jay Surti, 2013. "Capital Requirements for Over-the-Counter Derivatives Central Counterparties," IMF Working Papers 13/3, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/3
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    References listed on IDEAS

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    1. Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Chapters,in: NBER Macroeconomics Annual 1995, Volume 10, pages 299-349 National Bureau of Economic Research, Inc.
    2. Daniel Heller & Nicholas Vause, 2012. "Collateral requirements for mandatory central clearing of over-the-counter derivatives," BIS Working Papers 373, Bank for International Settlements.
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    Cited by:

    1. Amariei, Cosmina & Valiante, Diego, 2014. "The OTC derivatives markets after financial reforms," ECMI Papers 9283, Centre for European Policy Studies.
    2. Murphy, David & Nahai-Williamson, Paul, 2014. "Financial Stability Paper 30: Dear Prudence, won’t you come out to play? Approaches to the analysis of CCP default fund adequacy," Bank of England Financial Stability Papers 30, Bank of England.

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