Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/230378
Authors: 
King, Thomas
Nesmith, Travis D.
Paulson, Anna Louise
Prono, Todd
Year of Publication: 
2019
Series/Report no.: 
Working Paper No. 2019-12
Abstract: 
By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or more large financial institutions default. Liquidity-focused macroprudential stress tests could help to assess and manage this systemic liquidity risk.
Subjects: 
Financial systems
Central counterparties
CCPs
margin
liquidity risk
systemicrisk
financial stability
procyclicality
JEL: 
G23
G21
G28
E58
N22
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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