How Safe are Central Counterparties in Derivatives Markets?

H Peyton Young and Mark Paddrik ()

No 826, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Abstract We propose a general framework for estimating the vulnerability to default by a central counterparty (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 e ects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the U.S. credit default swaps market under shocks that are similar in magnitude to the Federal Reserve's stress tests. 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)
JEL-codes: D85 G01 G17 L14 (search for similar items in EconPapers)
Date: 2017-06-19
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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