Central Counterparty Loss-Allocation Rules

Posted: 9 May 2013

Date Written: April 29, 2013

Abstract

Given the increasingly important role of central counterparties (CCPs) in many financial markets, the insolvency of a CCP could be highly disruptive to the financial system if losses fall on participants in an uncertain and disorderly manner. In contrast to most other financial firms, CCPs’ obligations to their members, and vice versa, are governed by a central rulebook. CCPs have the ability to include in this rulebook rules setting out how losses exceeding the CCP’s pre-funded default resources are to be allocated between participants. Indeed, some CCPs have already done so. We term such rules ‘loss-allocation rules’. These could have the advantages, relative to the counterfactual of the disorderly insolvency of the CCP, of offering transparency and predictability to participants; providing for a quick and orderly allocation of losses; and potentially allowing the CCP to continue to provide critical services to the market. The detailed design of such rules has important implications for financial stability, as well as for the CCP and its stakeholders. Given these considerations, there is ongoing international work on the design of loss-allocation rules. This paper analyses the options available and offers principles to guide the design of loss-allocation rules.

Suggested Citation

Elliott, David, Central Counterparty Loss-Allocation Rules (April 29, 2013). Bank of England Financial Stability Paper No. 20, Available at SSRN: https://ssrn.com/abstract=2262248 or http://dx.doi.org/10.2139/ssrn.2262248

David Elliott (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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