Central counterparty capital and nondefault losses

Dennis McLaughlin

Journal of Financial Market Infrastructures

Abstract: This paper analyses the components of central counterparty (CCP) capital requirements and makes several observations on the potential for loss absorption. Our first observation on default losses appears to be widely understood in the industry: as long as the CCP is not prevented from following the standard loss waterfall in its rule book, any losses that arise directly from member defaults can be absorbed by using existing CCP resources together with rule book powers to allocate any excess losses back to surviving members. Our second observation is a new frequency/severity result on nondefault losses. These are losses that are not directly due to a member default or are not covered by the rule book: the chance that such a loss exceeds the regulatory capital actually held is a very rare (at most, a two in a thousand) event. Moreover, the expected shortfall of such an event is an insurable quantum of less than one year’s profit to the healthy CCP. In the absence of an empirical database on CCP losses, these observations are ultimately inferred from comparable loss data from the 2008 Bank for International Settlements Loss Data Collection Exercise and from tail loss severity parameters implicit in existing CCP regulatory capital requirements.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-financial-market-i ... nd-nondefault-losses (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:journ7:7907111

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 ().