Optimal Central Counterparty Risk Management
In 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.
|Date of creation:||2009|
|Contact details of provider:|| Postal: Börsenstrasse 15, P. O. Box, CH - 8022 Zürich|
Phone: +41 58 631 31 11
Fax: +41 58 631 39 11
Web page: https://www.snb.ch/en/ifor/research/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:snb:snbwpa:2009-07. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Enzo Rossi)
If references are entirely missing, you can add them using this form.