## 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

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### 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

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/central-counterparties-addressing-their-too-important-to-fail-nature-42637_