Capital requirements for over-the-counter derivatives central counterparties

Li Lin and Jay Surti

Journal of Banking & Finance, 2015, vol. 52, issue C, 140-155

Abstract: This paper assesses the sensitivity of the risk buffers, or capital requirements, of central counterparties clearing over-the-counter derivatives trades to a range of model inputs. It finds capital requirements to be highly sensitive to whether key model parameters are calibrated on a point-in-time versus stress-period basis, whether the risk tolerance metric adequately captures tail-risk events, and the ability – or lack thereof – to define exposures on the basis of netting sets spanning multiple risk factors. Our results suggest that there are considerable benefits from prudential authorities adopting a more prescriptive approach to central counterparties’ risk buffers, in line with recent enhancement of the capital regime for banks’ trading books.

Keywords: Central counterparties; Capital; Initial margin; Default fund; G-14 dealers (search for similar items in EconPapers)
JEL-codes: C53 C58 G23 G24 G28 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:52:y:2015:i:c:p:140-155

DOI: 10.1016/j.jbankfin.2014.08.015

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