Central Clearing and Systemic Liquidity Risk

G. Thomas Kingsley, Travis Nesmith, Anna Paulson and Todd Prono ()

No WP 2019-12, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP 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: margin; financial systems; Central Counterparties (CCPs); procyclicality; liquidity risk; financial stability (search for similar items in EconPapers)
JEL-codes: E58 G21 G23 G28 N22 (search for similar items in EconPapers)
Pages: 38
Date: 2019-12-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk, nep-mac and nep-rmg
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Related works:
Journal Article: Central Clearing and Systemic Liquidity Risk (2023)
Working Paper: Central Clearing and Systemic Liquidity Risk (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:87491

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DOI: 10.21033/wp-2019-12

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