Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210113 
Authors: 
Year of Publication: 
2017
Series/Report no.: 
Working Paper No. 3/2017
Publisher: 
Norges Bank, Oslo
Abstract: 
The clearing of over-the-counter transactions through central counterparties (CCPs), one of the pillars of financial reform following the crisis of 2007-2008, has promoted CCPs as key elements of the new global financial architecture. It is important to examine how these reforms have affected risks in the financial system and whether central clearing has attained the initial objective of the reform, which is to enhance financial stability and reduce systemic risk. We show that, rather than eliminating counterparty risk, central clearing transforms it into liquidity risk: margin calls transform accounting losses into realised losses which affect the liquidity buffers of clearing members. Accordingly, initial margin and default fund calculations should account for this liquidity risk in a realistic manner, especially for large positions. While recent discussions have centred on the solvency of CCPs, their capital and 'skin-in-the-game' and capital requirements for CCP exposures of banks, we argue that these issues are secondary and that the main focus of risk management and financial stability analysis should be on the liquidity of clearing members and the liquidity resources of CCPs. Clearing members should assess their exposure to CCPs in terms of liquidity, rather than counterparty risk. Stress tests involving CCPs should focus on liquidity stress testing and adequacy of liquidity resources.
Subjects: 
CCP
OTC derivatives
central clearing
central counterparty
systemic risk
liquidity risk
counterparty risk
default fund
collateral requirement
regulation
stress testing
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-968-5
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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