How Safe are Central Counterparties in Derivatives Markets?
Mark Paddrik and
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Mark Paddrik: Office of Financial Research, U.S. Treasury
Peyton Young: University of Oxford, Nuffield College
No 934, 2018 Meeting Papers from Society for Economic Dynamics
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 U.S. credit default swaps (CDS) 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.
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:934
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