Assessing the Safety of Central Counterparties

Mark Paddrik () and H. Peyton Young ()
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H. Peyton Young: Office of Financial Research

No 21-02, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: We propose a general framework for empirically assessing a central counterparty's capacity to cope with severe financial stress. Using public disclosure data for global central counterparties (CCPs), we show how to estimate the probability that a CCP could cover any specified fraction of payment defaults by its members. This framework supplements conventional standards of risk management such as Cover 2, and provides a comparative and comprehensive approach to assessing risk protection across CCPs that is not predicated on a specific number of member defaults. We apply the approach to a wide range of CCPs in different geographical jurisdictions and asset classes and find that there are substantial differences in protection coverage. In particular, large European CCPs appear to be significantly safer than their counterparts in Asia-Pacific and North America. These differences are also reflected in supervisory data that provide CCP members' risk assessments of the CCPs to which they belong.

Keywords: central counterparty; default waterfall; guarantee fund; default probability (search for similar items in EconPapers)
Pages: 24 pages
Date: 2021-06-09, Revised 2021-07-14
New Economics Papers: this item is included in nep-rmg and nep-sea
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Citations: View citations in EconPapers (2)

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