Central Counterparties: Addressing Their Too Important to Fail Nature

26 Pages Posted: 23 Feb 2015

See all articles by Froukelien Wendt

Froukelien Wendt

International Monetary Fund (IMF)

Date Written: January 2015

Abstract

Central counter parties (CCPs) can offer significant benefits to a market. However, CCPs are also highly interconnected with financial institutions and markets and therefore too important to fail. The increased volumes cleared through CCPs and their increasing global scope, in particular in the OTC derivatives market, make it even more important that systemic risks related to CCPs are managed. This paper argues that the current set of international policy measures does partly address these risks, but that alternative policy measures are needed to reduce remaining systemic risks. For example, the paper recommends network analysis to be conducted by CCPs and authorities to gauge potential losses and suggests a common international approach to central bank services to help reduce the dependency of CCPs on services provided by commercial banks.

Keywords: Systemically important financial institutions, Too-important-too-fail, Financial markets, Interconnectedness, Financial systems, International financial stability, central counterparties, interdependencies, too important to fail, recovery and resolution, risk waterfall., default, liquidity, derivatives, transparency, trading, collateral, derivatives markets, monetary fund, securities, credit losses, credit risk, risk management, contracts, financial crisis, liquidation, central banks, pension funds, commercial banks, regulatory frameworks, market participants, derivative markets, exchange, market information, international standards, capital requirements, capital markets, good, financial cri

JEL Classification: G01, G18, G23, G33

Suggested Citation

Wendt, Froukelien, Central Counterparties: Addressing Their Too Important to Fail Nature (January 2015). IMF Working Paper No. 15/21. Available at SSRN: https://ssrn.com/abstract=2568596

Froukelien Wendt (Contact Author)

International Monetary Fund (IMF) ( email )

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

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