Dear Prudence, won't you come out to play? Approaches to the analysis of CCP default fund adequacy

Our Financial Stability Papers are designed to develop new insights into risk management, to promote risk reduction policies, to improve financial crisis management planning or to report on aspects of our systemic financial stability work.
Published on 24 October 2014

Financial Stability Paper No. 30
By David Murphy and Paul Nahai-Williamson

Central counterparties (CCPs) are a key feature of the post-crisis financial system, and it is vital that they are robust. Indeed, as Paul Tucker said, ‘it is an understatement that it would be a disaster if a clearing house failed’ (Tucker (2011)). Therefore the question of how safe CCPs are is an important one. A key regulatory standard for CCPs is ‘cover 2’: this states that systemically important clearing houses must have sufficient financial resources to ‘cover’, or be robust under the failure of, their two largest members in extreme but plausible circumstances. This is an unusual standard, in that it is independent of the number of members a CCP has. Therefore it is natural to ask how prudent the cover 2 standard is for different sizes of CCP. This is the question investigated in this paper.

PDFDear Prudence, won’t you come out to play? Approaches to the analysis of central counterparty default fund adequacy

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