The Structure of Central Counterparty Clearing Networks and Network Stability

17 Pages Posted: 22 May 2012

See all articles by Rui Song

Rui Song

University of Illinois at Urbana-Champaign - College of Liberal Arts and Sciences

Richard Sowers

University of Illinois at Urbana-Champaign - Department of Mathematics

Jonathan Jones

Office of the Comptroller of the Currency

Date Written: May 21, 2012

Abstract

This paper measures central counterparty (CCP) clearing-network risk as the probability that the maximum cleared exposure of a CCP to an individual clearing member is atypically large. Our analytical derivation of this probability uses the large deviations theory of rare events, and shows that the probability depends on the topology (i.e., the levels of tiering and concentration) of the clearing network. We also derive and compute a CCP's Maximum-Exposure-at-Risk and relate it to the rate function in the expression for the probability of the CCP's maximum exposure. Based on our analysis, we provide insight into how network structure affects the stability of CCP clearing networks, and show that the riskiness of a clearing network can be characterized by the levels of tiering and concentration in conjunction with the rate function of the maximum-exposure probability. We find that there does not exist a monotonic positive or negative association, however, between the rate function and tiering and concentration.

Keywords: central counterparty, large deviations theory, clearing, systemic risk, network analysis

JEL Classification: E58, G01, G18

Suggested Citation

Song, Rui and Sowers, Richard and Jones, Jonathan, The Structure of Central Counterparty Clearing Networks and Network Stability (May 21, 2012). Available at SSRN: https://ssrn.com/abstract=2063843 or http://dx.doi.org/10.2139/ssrn.2063843

Rui Song

University of Illinois at Urbana-Champaign - College of Liberal Arts and Sciences ( email )

Champaign, IL 61820
United States

Richard Sowers (Contact Author)

University of Illinois at Urbana-Champaign - Department of Mathematics ( email )

1409 W. Green St.
Urbana, IL 61801
United States

HOME PAGE: http://www.math.uiuc.edu/~r-sowers/

Jonathan Jones

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

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