CCPs and network stability in OTC derivatives markets

Alexandra Heath, Gerard Kelly, Mark Manning, Sheri Markose and Ali Rais Shaghaghi

Journal of Financial Stability, 2016, vol. 27, issue C, 217-233

Abstract: Among the reforms to OTC derivative markets since the global financial crisis is a commitment to collateralize counterparty exposures and to clear standardized contracts via central counterparties (CCPs). The reforms aim to reduce interconnectedness and improve counterparty risk management in these important markets. At the same time, however, the reforms necessarily concentrate risk in one or a few nodes in the financial network and also increase institutions’ demand for high-quality assets to meet collateral requirements. This paper looks more closely at the implications of increased CCP clearing for both the topology and stability of the financial network. Building on Heath et al. (2013) and Markose (2012), the analysis supports the view that the concentration of risk in CCPs could generate instability if not appropriately managed. Nevertheless, maintaining CCP prefunded financial resources in accordance with international standards and dispersing any unfunded losses widely through the system can limit the potential for a CCP to transmit stress even in very extreme market conditions. The analysis uses the Bank for International Settlements Macroeconomic Assessment Group on Derivatives (MAGD) data set on the derivatives positions of the 41 largest bank participants in global OTC derivative markets in 2012.

Keywords: OTC derivatives reforms; Central counterparty (CCP); Netting efficiency; Collateralization (search for similar items in EconPapers)
JEL-codes: G G1 G20 G21 G28 N2 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:27:y:2016:i:c:p:217-233

DOI: 10.1016/j.jfs.2015.12.004

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