Cookies?
Library Header Image
LSE Research Online LSE Library Services

Systemic risk in markets with multiple central counterparties

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

[img] Text (Veraart_systemic-risk-in-markets--published) - Published Version
Available under License Creative Commons Attribution.

Download (1MB)

Identification Number: 10.1111/mafi.12446

Abstract

We provide a framework for modeling risk and quantifying payment shortfalls in cleared markets with multiple central counterparties (CCPs). Building on the stylized fact that clearing membership is shared among CCPs, we develop a modeling 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.

Item Type: Article
Official URL: https://onlinelibrary.wiley.com/journal/14679965
Additional Information: © 2024 The Author(s)
Divisions: Mathematics
Subjects: Q Science > QA Mathematics
H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C60 - General
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C62 - Existence and Stability Conditions of Equilibrium
G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
Date Deposited: 13 Aug 2024 11:24
Last Modified: 07 Oct 2024 16:45
URI: http://eprints.lse.ac.uk/id/eprint/124535

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics