Capital Requirements for Over-the-Counter Derivatives Central Counterparties
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 banksâ€™ capital requirements against trading book exposures, this paper assesses the sensitivity of central counterpartiesâ€™ 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 abilityâ€”or lack thereofâ€”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 counterpartiesâ€™ risk buffers, in line with recent enhancements to the capital regime for banks.
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- Gary Gorton & Richard Rosen, 1995.
"Banks and Derivatives,"
Center for Financial Institutions Working Papers
95-07, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Gary Gorton & Richard J. Rosen, 1995. "Banks and derivatives," Working Papers 95-12, Federal Reserve Bank of Philadelphia.
- Gary Gorton & Richard Rosen, "undated". "Banks and Derivatives," Rodney L. White Center for Financial Research Working Papers 6-95, Wharton School Rodney L. White Center for Financial Research.
- Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Working Papers 5100, National Bureau of Economic Research, Inc.
- Gary Gorton & Richard Rosen, "undated". "Banks and Derivatives," Rodney L. White Center for Financial Research Working Papers 06-95, Wharton School Rodney L. White Center for Financial Research.
- 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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