Assessing the Safety of Central Counterparties

24 Pages Posted: 16 Jul 2021

See all articles by Mark E. Paddrik

Mark E. Paddrik

Government of the United States of America - Office of Financial Research

Peyton Young

Government of the United States of America - Office of Financial Research; Brookings Institution; University of Oxford

Date Written: July 14, 2021

Abstract

We propose a general framework for empirically assessing a central counterparty's capacity to cope with severe financial stress. Using public disclosure data for global central counterparties (CCPs), we show how to estimate the probability that a CCP could cover any specified fraction of payment defaults by its members. This framework supplements conventional standards of assessing risk protection across CCPs that is not predicated on a specific number of member defaults. We apply the approach to a wide range of CCPs in different geographical jurisdictions and asset classes and find that there are substantial differences in protection coverage. In particular, large European CCPs appear to be significantly safer than their counterparts in Asia-Pacific and North America. These differences are also reflected in supervisory data that provide CCP members' risk assessments of the CCPs to which they belong.

Keywords: central counterparty, default waterfall, guarantee fund, default probability

JEL Classification: G10, G23, G28, L14

Suggested Citation

Paddrik, Mark Endel and Young, Peyton, Assessing the Safety of Central Counterparties (July 14, 2021). Available at SSRN: https://ssrn.com/abstract=3886976 or http://dx.doi.org/10.2139/ssrn.3886976

Mark Endel Paddrik (Contact Author)

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Peyton Young

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

University of Oxford

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
7
Abstract Views
151
PlumX Metrics