CCP Resilience and Clearing Membership

Angela Armakola (1, 2) , Jean-Paul Laurent (1, 2)

1 PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management
2 Labex ReFi

Central clearing counterparties (CCPs) have become a major concern regarding systemic risk and financial stability. Thus, assessing CCP resilience is a key challenge in the new financial landscape. We consider pre-funded waterfall resources, recovery tools and the assessment powers of major European and US CCPs. We also investigate loss allocation rules at the end of the waterfall and the impact of emerging resolution regimes on contingent liquidity obligations. As the resilience of a CCP depends on the soundness of the member base and its ability to provide funds, we question the payment capacity of a member base under normal and stressed scenarios. We show that under a cover 2 stressed scenario, member base quality erodes, jeopardising the ability of clearing members to fulfil possible contingent liquidity obligations. Conflicts of interest depending on the average quality and heterogeneity of member bases are shown to be a further matter of concern regarding CCP resilience.

Keywords: CCPs; financial stability; risk mutualisation; contingent liquidity; recovery; resolution

Domains: Quantitative Finance [q-fin]; Risk Management [q-fin.RM]; Quantitative Finance [q-fin]; General Finance [q-fin.GN]

Angela Armakola, Jean-Paul Laurent. CCP Resilience and Clearing Membership. 2022. ⟨hal-03679452⟩