Limiting Taxpayer 'Puts' - An Example from Central Counterparties
17 Pages Posted: 11 Dec 2014
Date Written: November 2014
Abstract
Nonbanks such as central counterparties (CCPs) are a useful lens to see how regulators view the role of the lender-of-last-resort (LOLR). This paper explores the avenues available when a nonbank failure is likely, specifically by considering the options of keeping CCPs afloat. It is argued that CCPs have, by regulatory fiat, become "too important to fail," and thus the imperative should be greater loss-sharing by all participants that better align the distribution of risks and rewards of CCPs, the clearing members and derivative end-users. In the context of LOLR, the proposed variation margin gains haircut (VMGH) is discussed as a way of limiting the taxpayer put.
Keywords: Nonbank financial sector, Systemically important financial institutions, Too-important-too-fail, Burden sharing, Risk management, Lender of last resort, Lender-of-last-resort, central counterparties, variation margin gains haircut, financial stability, derivative, derivatives, contracts, collateral, central bank, future, government policy, financial market, collateral arrangements, monetary fund, markets, public funds, financial collateral, interests, corporate insolvency, financial infrastructures, balance sheet, financial markets, hedge, international financial markets, mortgages, liquidity, pension, liquidation, depository institutions, asset managers, instruments, securities, bankruptcy,
JEL Classification: F33, G21, G28, G18, G15, K22
Suggested Citation: Suggested Citation