Risk Management Practices of Central Counterparties: European vs. Third-Country CCPs

Abstract

Relying on recent CPMI-IOSCO public quantitative disclosure (PQD) data provided by 35 central counterparties (CCPs) over the 2015-2018 period, this paper empirically explores the risk management practices of central counterparties. We examine whether European CCPs are more prudent relative to their third-country peers. Our results indicate that EU CCPs request from their clearing members initial margins and default fund contributions that are of higher quality compared to those requested by non-EU CCPs. Omnibus and individual client segregation is more common in EU CCPs, suggesting a higher level of asset protection for clearing members. Regarding investment risk management, EU CCPs prefer to deposit cash at central banks, while non-EU CCPs rather have cash deposits at commercial banks. European CCPs have almost three times as many liquid resources than non-EU CCPs and rely more on cash deposited at central banks of issue. Their non-EU peers prefer unsecured cash deposits at commercial banks and unsecured committed lines of credit as liquidity resources.

Keywords: central counterparties, default, risk management, margin requirements, EMIR

JEL Classification: G23, G28, K22, K23