Capital Requirements for Over-the-Counter Derivatives Central Counterparties

48 Pages Posted: 28 Feb 2013

See all articles by Li Lin

Li Lin

affiliation not provided to SSRN

Jay Surti

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2013

Abstract

The central counterparties dominating the market for the clearing of over-the-counter interest rate and credit derivatives are globally systemic. Employing methodologies similar to the calculation of banks’ capital requirements against trading book exposures, this paper assesses the sensitivity of central counterparties’ required risk buffers, or capital requirements, to a range of model inputs. We find them to be highly sensitive to whether key model parameters are calibrated on a point-in-time versus stress-period basis, whether the risk tolerance metric adequately captures tail events, and the ability — or lack thereof — to define exposures on the basis of netting sets spanning multiple risk factors. Our results suggest that there are considerable benefits from having prudential authorities adopt a more prescriptive approach to for central counterparties’ risk buffers, in line with recent enhancements to the capital regime for banks.

Keywords: Banks, Capital, Central counterparties, Economic models, Financial instruments, G-14 dealers, International capital markets, capital, cash flows, credit derivatives, default fund, derivative, derivative contracts, derivatives instruments, derivatives markets, derivatives trading, derivatives transactions, discount rate, financial institutions, financial instruments, financial market, financial markets, financial stability, financial statements, financial system, fixed income, future cash flows, hedging, hedging strategies, initial margin, interest rate derivative, interest rate derivatives, interest rate futures, interest rate risk, international capital, international capital markets, inter

JEL Classification: C53, C58, G23, G24, G28

Suggested Citation

Lin, Li and Surti, Jay, Capital Requirements for Over-the-Counter Derivatives Central Counterparties (January 2013). IMF Working Paper No. 13/3. Available at SSRN: https://ssrn.com/abstract=2226276

Li Lin (Contact Author)

affiliation not provided to SSRN ( email )

Jay Surti

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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