{
  "title": "Limiting Taxpayer \"Puts\" - An Example from Central Counterparties",
  "publication": "IMF Working Papers, November 12, 2014",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/limiting-taxpayer-puts-an-example-from-central-counterparties-42451",
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  "summary": "Nonbanks such as central counterparties (CCPs) are a useful lens to see how regulators view the role of the lender-of-last-resort (LOLR). This paper explores the avenues available when a nonbank failure is likely, specifically by considering the options of keeping CCPs afloat.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Nonbanks such as central counterparties (CCPs) provide a lens on how regulators view the role of the lender-of-last-resort (LOLR).\n- The paper explores avenues available when a nonbank failure is likely, specifically considering options for keeping CCPs afloat.\n- 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.\n- In the context of LOLR, the paper discusses the proposed variation margin gains haircut (VMGH) as a mechanism to limit the taxpayer put."
    },
    {
      "heading": "Key findings and observations",
      "content": "- CCPs are treated de facto as “too important to fail” due to regulatory design and expectations.\n- Greater loss-sharing across market participants is necessary to realign incentives between CCPs, clearing members, and derivative end-users.\n- The variation margin gains haircut (VMGH) is presented as a concrete proposal to limit public-sector exposure in CCP stress or failure scenarios."
    },
    {
      "heading": "Policy proposals and mechanisms",
      "content": "- Variation margin gains haircut (VMGH)\n  - Presented as a way to limit the taxpayer put in CCP distress scenarios.\n  - Intended to share losses associated with variation margin gains that would otherwise be protected implicitly by public-sector backstops.\n- Broader loss-sharing regimes\n  - 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."
    },
    {
      "heading": "Subject areas and keywords",
      "content": "- Subjects: Asset and liability management; Banking; Central counterparty clearing house; Financial markets; Liquidity; Market risk\n- 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\n\nSource: 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.\n\n---\n\n Content in this bundle\n\n- wp14203 - References\n  - wp14203 - References (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp14203 - References (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/limiting-taxpayer-puts-an-example-from-central-counterparties-42451"
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    "Authors: Manmohan Singh",
    "Published: November 12, 2014",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781498322423.001",
    "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.",
    "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.",
    "Variation margin gains haircut (VMGH)",
    "Broader loss-sharing regimes",
    "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",
    "**_wp14203 - References**"
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