Static Models of Central Counterparty Risk

Forthcoming: Journal of Financial Engineering

32 Pages Posted: 7 Feb 2014 Last revised: 20 Apr 2015

See all articles by Samim Ghamami

Samim Ghamami

Securities and Exchange Commission (SEC); New York University (NYU); University of California, Berkeley - Center for Risk Management Research

Date Written: April 19, 2015

Abstract

Following the 2009 G-20 clearing mandate, international standard setting bodies (SSBs) have outlined a set of principles for central counterparty (CCP) risk management. They have also devised formulaic CCP risk capital requirements on clearing members for their central counterparty exposures. There is still no consensus among CCP regulators and bank regulators on how central counterparty risk should be measured coherently in practice. A conceptually sound and logically consistent definition of the CCP risk capital in the absence of a unifying CCP risk measurement framework is challenging. Incoherent CCP risk capital requirements may create an obscure environment disincentivizing the central clearing of over the counter (OTC) derivatives transactions. Based on novel applications of well-known mathematical models in finance, this paper introduces a risk measurement framework that coherently specifies all layers of the default waterfall resources of typical derivatives CCPs. The proposed framework gives the first risk sensitive definition of the CCP risk capital based on which less risk sensitive non-model-based methods can be evaluated.

Keywords: Risk Management, Clearing Mandate, Central Counterparty Risk, Risk Capital, Stochastic Models, Copulas, Monte Carlo Simulation

JEL Classification: G21, C15

Suggested Citation

Ghamami, Samim, Static Models of Central Counterparty Risk (April 19, 2015). Forthcoming: Journal of Financial Engineering, Available at SSRN: https://ssrn.com/abstract=2390946 or http://dx.doi.org/10.2139/ssrn.2390946

Samim Ghamami (Contact Author)

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