Financial Stability Review
Payment and Settlement Systems Articles
2002
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Modelling
Risk in Central Counterparty Clearing Houses: A Review
(116k)
(Issue 13, December 2002)
Central counterparty clearing houses (CCPs) form a core part of the financial market infrastructure in most developed economies. CCPs were established originally to protect market participants from counterparty risk in exchange-traded derivatives markets, but they now also have an important presence in cash and over-the-counter (OTC) derivatives markets. By interposing themselves in transactions, CCPs help to manage counterparty risk for market participants and facilitate the netting of positions. In performing this role, however, CCPs are themselves exposed to various risks. To protect themselves, they have developed various procedures, amongst which the margining of members' positions plays a central role. This article discusses a range of academic studies which attempt to model the risks faced by CCPs, and which consider how margins and the level of other default resources might be set. It notes that margins alone, calculated to cover losses from typical price movements over one or more days, may not be sufficient to protect CCPs from rare but plausible events. CCPs need to assess the losses they could face on occasions when margin proves insufficient, and ensure that they can meet these losses from extreme events by other means.
Key Resources
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Memorandum of Understanding between HM Treasury,
the Bank of England and the Financial Services Authority
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