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How Safe are Central Counterparties in Derivatives Markets?

Mark Paddrik () and H. Peyton Young ()
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H. Peyton Young: Office of Financial Research

No 17-06, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: We propose a general framework for estimating the likelihood of default by central counterparties (CCP) in derivatives markets. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the credit default swaps (CDS) market under shocks that are similar in magnitude to the Federal Reserve’s 2015 Comprehensive Capital Analysis and Review trading book shock. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.

Keywords: Credit default swaps; central counterparties; stress testing; systemic risk; financial networks (search for similar items in EconPapers)
Pages: 22 pages
Date: 2017-11-02
New Economics Papers: this item is included in nep-rmg
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https://www.financialresearch.gov/working-papers/f ... ivatives-Markets.pdf First version, 2017 (application/pdf)

Related works:
Working Paper: How Safe are Central Counterparties in Derivatives Markets? (2018) Downloads
Working Paper: How Safe are Central Counterparties in Derivatives Markets? (2017) Downloads
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