Close-Out Risk Evaluation (CORE): A New Risk Management Approach for Central Counterparties

46 Pages Posted: 11 Apr 2013 Last revised: 28 May 2013

Marco Avellaneda

New York University (NYU) - Courant Institute of Mathematical Sciences; Finance Concepts LLC

Rama Cont

University of Oxford; CNRS

Date Written: April 9, 2013


This paper introduces the CORE methodology for managing risk of multi-market central-counterparties. CORE generalizes the classical SPAN method of stress scenarios by incorporating explicitly market liquidity of listed instruments and modeling the liquidity pro file of OTC instruments and the liquidation-by-auction mechanism. In the presence of liquidity constraints, there is a difference between unrealized ex ante mark-to-market losses, say, on the date of default, and realized losses after liquidation is concluded. This leads us to formulate an optimal liquidation strategy for portfolios under stress-scenarios and liquidity constraints. We formulate this problem as the maximization of an objective function which involves a sequence of potential transient losses (realized and mark-to-market) along the liquidation period. The objective function is designed to minimize transient losses and thus reduce funding liquidity requirements for the CCP along the liquidation period; it is shown to be robust with respect to liquidation-by-auction assumptions and to liquidity constraints.

Computationally, we formulate CORE as a Linear Programming problem under linear constraints, which can be solved using high-performance large-scale optimization packages such as CPLEX and GUROBI. We illustrate the computation of the CORE strategy on a series of sample portfolios and compare the anticipated gains in reserve capital due to CORE for the di fferent examples. Preliminary tests indicate that improvements of between 20 and 60% can be realized by applying optimal liquidation schedules which match instruments with common risk factors according to their liquidity profiles in the liquidation process.

Keywords: Risk-management, Liquidity, Central Counterparties, Central Clearing

JEL Classification: C61

Suggested Citation

Avellaneda, Marco and Cont, Rama, Close-Out Risk Evaluation (CORE): A New Risk Management Approach for Central Counterparties (April 9, 2013). Available at SSRN: or

Marco Avellaneda (Contact Author)

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY 10012
United States
212-998-3129 (Phone)
212-995-4121 (Fax)

Finance Concepts LLC ( email )

590 Madison Avenue
21st Floor
New York, NY 10022
United States


Rama Cont

University of Oxford ( email )

Andrew Wiles Building
Radcliffe Observatory Quarter (550)
Oxford, OX2 6GG
United Kingdom

CNRS ( email )

Sorbonne University


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