Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210083 
Authors: 
Year of Publication: 
2015
Series/Report no.: 
Working Paper No. 16/2015
Publisher: 
Norges Bank, Oslo
Abstract: 
Central counterparties (CCPs) have become pillars of the new global financial architecture following the financial crisis of 2008. The key role of CCPs in mitigating counterparty risk and contagion has in turn cast them as systemically important financial institutions whose eventual failure may lead to potentially serious consequences for financial stability, and prompted discussions on CCP risk management standards and safeguards for recovery and resolutions of CCPs in case of failure. We contribute to the debate on CCP default resources by focusing on the incentives generated by the CCP loss allocation rules for the CCP and its members and discussing how the design of loss allocation rules may be used to align these incentives in favor of outcomes which benefit financial stability. After reviewing the ingredients of the CCP loss waterfall and various proposals for loss recovery provisions for CCPs, we examine the risk management incentives created by different ingredients in the loss waterfall and discuss possible approaches for validating the design of the waterfall. We emphasize the importance of CCP stress tests and argue that such stress tests need to account for the interconnectedness of CCPs through common members and cross-margin agreements. A key proposal is that capital charges on assets held against CCP Default Funds should depend on the quality of the risk management of the CCP, as assessed through independent stress tests.
Subjects: 
CCP
EMIR
OTC derivatives
central clearing
central counterparty
systemic risk
default risk
counterparty risk
default fund
mechanism design
regulation
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-882-4
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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