XVA Metrics for CCP Optimisation

Claudio Albanese, Yannick Armenti () and Stéphane Crépey ()
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Stéphane Crépey: UFR Mathématiques et informatique [Sciences] - Université Paris Cité - UPCité - Université Paris Cité, LPSM (UMR_8001) - Laboratoire de Probabilités, Statistique et Modélisation - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité

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Abstract: Based on an XVA analysis of centrally cleared derivative portfolios, we consider two capital and funding issues pertaining to the efficiency of the design of central counterparties (CCPs). First, we consider an organization of a clearing framework, whereby a CCP would also play the role of a centralized XVA calculator and management center. The default fund contributions would become pure capital at risk of the clearing members, remunerated as such at some hurdle rate, i.e. return-on-equity. Moreover, we challenge the current default fund Cover 2 EMIR sizing rule with a broader risk based approach, relying on a suitable notion of economic capital of a CCP. Second, we compare the margin valuation adjustments (MVAs) resulting from two different initial margin raising strategies. The first one is unsecured borrowing by the clearing member. As an alternative, the clearing member delegates the posting of its initial margin to a so called specialist lender, which, in case of default of the clearing member, receives back from the CCP the portion of IM unused to cover losses. The alternative strategy results in a significant MVA compression. A numerical case study shows that the volatility swings of the IM funding expenses can even be the main contributor to an economic capital based default fund of a CCP. This is an illustration of the transfer of counterparty risk into liquidity risk triggered by extensive collateralization.

Keywords: Central counterparty (CCP) initial margin default fund cost of funding initial margin (MVA) cost of capital (KVA) Mathematics Subject Classification: 60G44 91B25 91B26 91B30 91B70 91B74 91G20 91G40 91G60 91G80 JEL Classification: G13 G14 G28 G33 M41; Central counterparty (CCP); initial margin; default fund; cost of funding initial margin (MVA); cost of capital (KVA) (search for similar items in EconPapers)
Date: 2020
Note: View the original document on HAL open archive server: https://hal.science/hal-03910114v1
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Citations: View citations in EconPapers (3)

Published in Statistics & Risk Modeling with Applications in Finance and Insurance, 2020

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Journal Article: XVA metrics for CCP optimization (2020)
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