Veraart, Luitgard A. M. ORCID: 0000-0003-1183-2227 and Aldasoro, Iñaki
(2024)
Systemic risk in markets with multiple central counterparties.
Mathematical Finance.
ISSN 0960-1627
(In Press)
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Text (Systemic Risk in Markets with Multiple Central Counterparties)
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Abstract
We provide a framework for modelling risk and quantifying payment shortfalls in cleared markets with multiple central counterparties (CCPs). Building on the stylised fact that clearing membership is shared among CCPs, we develop a modelling framework that captures the interconnectedness of CCPs and clearing members. We illustrate stress transmission mechanisms using simple examples as well as empirical evidence based on calibrated data. Furthermore, we show how stress mitigation tools such as variation margin gains haircutting by one CCP can have spillover effects on other CCPs. The framework can be used to enhance CCP stress-testing, which currently relies on the “Cover 2” standard requiring CCPs to be able to withstand the default of their two largest clearing members. We show that who these two clearing members are can be significantly affected if one considers higher-order effects arising from interconnectedness through shared clearing membership. Looking at the full network of CCPs and shared clearing members is therefore important from a financial stability perspective.
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