Limiting Taxpayer "Puts" - An Example from Central Counterparties
IMF Working Papers, November 12, 2014
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Bibliographic details
- Authors: Manmohan Singh
- Published: November 12, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498322423.001
Summary
- Nonbanks such as central counterparties (CCPs) provide a lens on how regulators view the role of the lender-of-last-resort (LOLR).
- The paper explores avenues available when a nonbank failure is likely, specifically considering options for keeping CCPs afloat.
- It is argued that CCPs have, by regulatory fiat, become “too important to fail,” creating an imperative for greater loss-sharing by all participants to better align the distribution of risks and rewards among CCPs, clearing members, and derivative end-users.
- In the context of LOLR, the paper discusses the proposed variation margin gains haircut (VMGH) as a mechanism to limit the taxpayer put.
Key findings and observations
- CCPs are treated de facto as “too important to fail” due to regulatory design and expectations.
- Greater loss-sharing across market participants is necessary to realign incentives between CCPs, clearing members, and derivative end-users.
- The variation margin gains haircut (VMGH) is presented as a concrete proposal to limit public-sector exposure in CCP stress or failure scenarios.
Policy proposals and mechanisms
- Variation margin gains haircut (VMGH)
- Presented as a way to limit the taxpayer put in CCP distress scenarios.
- Intended to share losses associated with variation margin gains that would otherwise be protected implicitly by public-sector backstops.
- Broader loss-sharing regimes
- Policies aimed at increasing the distribution of risks and rewards among CCPs, clearing members, and end-users to reduce moral hazard and implicit public guarantees.
Subject areas and keywords
- Subjects: Asset and liability management; Banking; Central counterparty clearing house; Financial markets; Liquidity; Market risk
- Keywords (as listed): allocation choices arise; allocation option; CCP credit risk; CCP failure; CCP insolvent; CCP rule; central bank; central counterparties; central counterparty; Central counterparty clearing house; Global; Lender-of-last-resort; Liquidity; market; risk management practice; variation margin; variation margin gains haircut; WP
Source: Manmohan Singh, "Limiting Taxpayer "Puts" - An Example from Central Counterparties", IMF Working Papers 2014, 203; 16 pages; DOI: https://doi.org/10.5089/9781498322423.001.
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