Central Clearing and Systemic Liquidity Risk

39 Pages Posted: 9 Jul 2021 Last revised: 3 Jul 2021

See all articles by G. Thomas Kingsley

G. Thomas Kingsley

affiliation not provided to SSRN

Travis D. Nesmith

Board of Governors of the Federal Reserve System

Anna L. Paulson

Federal Reserve Bank of Chicago

Todd Prono

affiliation not provided to SSRN

Date Written: December, 2019

Abstract

By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or more large financial institutions default. Liquidity-focused macroprudential stress tests could help to assess and manage this systemic liquidity risk.

Keywords: margin, financial systems, Central Counterparties (CCPs), procyclicality, liquidity risk, financial stability

JEL Classification: E58, G21, G23, G28, N22

Suggested Citation

Kingsley, G. Thomas and Nesmith, Travis D. and Paulson, Anna L. and Prono, Todd, Central Clearing and Systemic Liquidity Risk (December, 2019). FRB of Chicago Working Paper No. WP 2019-12, Available at SSRN: https://ssrn.com/abstract=3879332 or http://dx.doi.org/10.21033/wp-2019-12

G. Thomas Kingsley (Contact Author)

affiliation not provided to SSRN

No Address Available

Travis D. Nesmith

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452-2907 (Phone)
(202) 872 7533 (Fax)

HOME PAGE: http://www.federalreserve.gov/research/staff/nesmithtravisd.htm

Anna L. Paulson

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312 322 2169 (Phone)

Todd Prono

affiliation not provided to SSRN

No Address Available

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