Central Counterparty Default Waterfalls and Systemic Loss

Mark Paddrik () and Simpson Zhang ()
Additional contact information
Simpson Zhang: Office of the Comptroller of the Currency

No 20-04, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: Central counterparty default waterfalls act as last lines of defense in over-the-counter markets by managing and allocating resources to cover defaults of clearing members and clients. However, central counterparties face competing objectives in setting up their default waterfalls. In this paper we evaluate the trade-offs between default waterfall resiliency and central clearing, using a unique and comprehensive dataset containing all U.S. cleared and bilateral credit default swap positions. We evaluate the resiliency of different default waterfall designs, accounting for the interconnectedness of payments in the system, the presence of client clearing obligations for members, and the distribution of losses among market participants.

Keywords: central counterparty; systemic risk; default waterfall; financial networks; credit default swaps (search for similar items in EconPapers)
Pages: 55 pages
Date: 2020-06-18
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Central Counterparty Default Waterfalls and Systemic Loss (2023)
Working Paper: Central Counterparty Default Waterfalls and Systemic Loss (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ofr:wpaper:20-04

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