## Capital Requirements for Over-the-Counter Derivatives Central Counterparties

_IMF Working Papers, January 8, 2013_

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## Bibliographic details
- Authors: Li Lin, Jay Surti
- Published: January 8, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475535501.001

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### Summary
- The central counterparties dominating the market for the clearing of over-the-counter interest rate and credit derivatives are globally systemic.
- Employing methodologies similar to the calculation of banks’ capital requirements against trading book exposures, this paper assesses the sensitivity of central counterparties’ required risk buffers, or capital requirements, to a range of model inputs.
- The paper’s results suggest considerable benefits from having prudential authorities adopt a more prescriptive approach to central counterparties’ risk buffers, in line with recent enhancements to the capital regime for banks.

### Key findings on model sensitivity
- Required risk buffers are highly sensitive to calibration choices:
  - Sensitivity to whether key model parameters are calibrated on a point-in-time versus stress-period basis.
  - Sensitivity to whether the risk tolerance metric adequately captures tail events.
  - Sensitivity to the ability—or lack thereof—to define exposures on the basis of netting sets spanning multiple risk factors.
- The analysis employs methodologies similar to banks’ trading book capital calculations to assess these sensitivities.

### Policy implications and recommendations
- Considerable benefits arise from prudential authorities adopting a more prescriptive approach to central counterparties’ risk buffers.
- Aligning central counterparty capital requirements with recent enhancements to the capital regime for banks is recommended.

### Subject areas and keywords
- Subject: Banking; Central counterparty clearing house; Credit default swap; Currencies; Econometric analysis; Financial markets; Financial regulation and supervision; Hedging; Money; Vector autoregression
- Keywords: capital; Central counterparties; Central counterparty clearing house; clearing OTC-CDS; Credit default swap; Currencies; default fund; derivatives position; Europe; financial market; G-14 dealers; Global; Hedging; IM requirements; initial margin; interest rate; interest rate derivative; interest rate derivative contract; market condition; market value; meeting CM default; OTC-D market; OTC-interest rate products; overnight rate; risk buffer; Vector autoregression; WP

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/capital-requirements-for-over-the-counter-derivatives-central-counterparties-40220_