Central counterparties need thicker skins

Vijay Albuquerque and Christopher Perkins and Mariam Rafi

Journal of Financial Market Infrastructures

Abstract: ABSTRACT In the aftermath of the global financial crisis, clearinghouses play an increasingly;important role in systemic risk management. Accordingly, central counterparty (CCP);resiliency, recovery and resolution is now moving to the forefront of regulatory focus,;as the industry tackles concerns around CCPs becoming the next "too big to fail" institutions.;This paper focuses on one element of CCP risk frameworks, a CCP's own;contribution to the default waterfall, otherwise known as "skin in the game" (SITG).;While regulation generally holds CCPs to stringent risk management standards, SITG;calibration is left largely to CCPs' own discretion. CCP SITG has remained largely;static and disproportionately sized relative to the risk in the system. In this paper, we;propose an analytical approach to calculating CCP SITG that ensures CCPs are properly;incentivized to share responsibility for socialization of risk during a default management;scenario. Our dynamic, risk-based model incorporates an expected shortfall;framework, with regulatory floors to control for pro-cyclicality and address concentration;risk. As the industry and regulators work to formulate an appropriate calibration;model for CCP SITG, this expected shortfall framework presents a reasonable starting;point for a construct that establishes balance and incentivizes both CPs and clearing;members to thoughtfully manage risk brought into the system.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-financial-market-i ... s-need-thicker-skins (text/html)

Related works:
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:rsk:journ7:2449638

Access Statistics for this article

More articles in Journal of Financial Market Infrastructures from Journal of Financial Market Infrastructures
Bibliographic data for series maintained by Thomas Paine ().