Systemic risk in markets with multiple central counterparties

Luitgard Anna Maria Veraart and Iñaki Aldasoro

Mathematical Finance, 2025, vol. 35, issue 1, 214-262

Abstract: We provide a framework for modeling risk and quantifying payment shortfalls in cleared markets with multiple central counterparties (CCPs). Building on the stylized fact that clearing membership is shared among CCPs, we develop a modeling framework that captures the interconnectedness of CCPs and clearing members. We illustrate stress transmission mechanisms using simple examples as well as empirical evidence based on calibrated data. Furthermore, we show how stress mitigation tools 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 if one considers 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.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/mafi.12446

Related works:
Working Paper: Systemic risk in markets with multiple central counterparties (2025)
Working Paper: Systemic Risk in Markets with Multiple Central Counterparties (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:35:y:2025:i:1:p:214-262

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0960-1627

Access Statistics for this article

Mathematical Finance is currently edited by Jerome Detemple

More articles in Mathematical Finance from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().