Central Counterparties: Addressing their Too Important to Fail Nature
IMF Working Papers, January 27, 2015
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Bibliographic details
- Authors: Froukelien Wendt
- Published: January 27, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475572933.001
Summary
- Central counterparties (CCPs) offer significant benefits to a market but are highly interconnected with financial institutions and markets and therefore "too important to fail."
- Increased volumes cleared through CCPs and their increasing global scope, in particular in the OTC derivatives market, make management of systemic risks related to CCPs more important.
- The paper argues that the current set of international policy measures partly addresses these risks, but alternative policy measures are needed to reduce remaining systemic risks.
Key Findings and Analytical Observations
- CCPs are highly interconnected with financial institutions and markets, creating systemic risk if a CCP were to fail.
- Growth in volumes cleared through CCPs and expansion of CCPs’ global scope—especially in the OTC derivatives market—increases systemic importance and potential contagion channels.
- Existing international policy measures address some systemic risks but leave residual risks that require additional or alternative policy responses.
- Network analysis is recommended as a tool for CCPs and authorities to gauge potential losses and interconnections among market participants.
- Dependency of CCPs on services provided by commercial banks is highlighted as a source of vulnerability.
Policy Recommendations and Measures Suggested
- Conduct network analysis by CCPs and authorities to assess potential losses and interconnections across clearing members and markets.
- Develop a common international approach to central bank services to reduce CCPs’ dependence on services provided by commercial banks.
- Consider alternative policy measures beyond the current international policy set to address remaining systemic risks related to CCPs (examples include the measures noted above).
Subject Areas and Keywords (as listed)
- Subject: Asset and liability management; Banking; Central counterparty clearing house; Central securities depositories; Collateral; Commercial banks; Financial institutions; Financial markets; Liquidity
- Keywords: central counterparties; Central counterparty clearing house; Central securities depositories; Collateral; Commercial banks; defaulting clearing member; derivatives market; Europe; Global; interconnectedness; interdependencies; Liquidity; margin calls; market participant; market volatility; recovery and resolution; recovery plan; risk waterfall; too important to fail; WP