## 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

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### 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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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/limiting-taxpayer-puts-an-example-from-central-counterparties-42451_