Systemic Risk in Markets with Multiple Central Counterparties

Iñaki Aldasoro and Luitgard A M Veraart

No 1052, BIS Working Papers from Bank for International Settlements

Abstract: We provide a framework for modelling risk and quantifying payment shortfalls in cleared markets with multiple central counterparties (CCPs). Building on the stylised fact that clearing membership is shared among CCPs, we show how this can transmit stress across markets through multiple CCPs. We provide stylised examples to lay out how such stress transmission can take place, as well as empirical evidence to illustrate that the mechanisms we study could be relevant in practice. Furthermore, we show how stress mitigation mechanisms such as variation margin gains haircutting by one CCP can have spillover effects on other CCPs. The framework can be used to enhance CCP stress-testing, which currently relies on the "Cover 2" standard requiring CCPs to be able to withstand the default of their two largest clearing members. We show that who these two clearing members are can be significantly affected by higher-order effects arising from interconnectedness through shared clearing membership. Looking at the full network of CCPs and shared clearing members is therefore important from a financial stability perspective.

Keywords: central counterparties; systemic risk; contagion; stress testing; Cover 2. (search for similar items in EconPapers)
JEL-codes: C60 C62 G18 G21 G23 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2022-11
New Economics Papers: this item is included in nep-ban and nep-rmg
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Related works:
Journal Article: Systemic risk in markets with multiple central counterparties (2025)
Working Paper: Systemic risk in markets with multiple central counterparties (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1052

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