Central Clearing and Systemic Liquidity Risk

Thomas King, Travis Nesmith, Anna Paulson and Todd Prono ()

No 2020-009r1, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: By stepping between bilateral counterparties, central counterparties (CCPs) transform credit exposure, thereby improving financial stability. But, large CCPs are concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they require participants to provide cash. Such requirements increase with market volatility; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCPs’ resilience in the rare event that one or more large financial institutions default. Liquidity-focused macroprudential stress tests could help to assess and manage this systemic liquidity risk.

Keywords: Financial systems; Central counterparties; CCPs; Margin; Liquidity risk; Systemic risk; Financial stability; Procyclicality (search for similar items in EconPapers)
JEL-codes: E58 G21 G23 G28 N22 (search for similar items in EconPapers)
Pages: 46 p.
Date: 2020-01-31, Revised 2022-05-06
New Economics Papers: this item is included in nep-ban, nep-mac and nep-rmg
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Citations: View citations in EconPapers (2)

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https://www.federalreserve.gov/econres/feds/files/2020009r1pap.pdf (application/pdf)

Related works:
Journal Article: Central Clearing and Systemic Liquidity Risk (2023)
Working Paper: Central Clearing and Systemic Liquidity Risk (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-09

DOI: 10.17016/FEDS.2020.009r1

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