General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
February 11, 2019

BIS published a working paper that studies the incentives of a for-profit central counterparties (CCP) with limited liability. A CCP faces a trade-off between fee income and counterparty credit risk. The paper investigates whether such CCP incentives undermine financial stability.

Such for-profit CCPs choose how much capital to hold and set the collateral requirement for their clearing members, to maximize their own profits. They face a trade-off between fee income and counterparty credit risk. However, the limited liability of a CCP creates a misalignment between its choices and the socially optimal solution to this trade-off. In studying the factors that give rise to this misalignment, the paper derives the optimal capital regulations and examines the significant role of CCP ownership structures in safeguarding financial stability. This is the first paper that argues that a for-profit CCP would seek to hold less capital than is optimal from a social welfare perspective and, similarly, would require less collateral from its members than is optimal, thus undermining financial stability. From an empirical angle, this paper also provides the first evidence of a relationship between the capital held by CCPs and the collateral they require.

The model developed in this paper implies that better-capitalized CCPs set higher collateral requirements. Empirical evidence suggests that a 1% increase in a for-profit CCP's capital is associated with a 0.6% increase in its members' collateral. Another implication, again deriving from its capitalization and collateral choices, is that a for-profit CCP is more likely to fail than is socially optimal. By contrast, a user-owned CCP chooses to hold more capital and is, therefore, less likely to fail. The data show that user-owned CCPs hold significantly more capital, on average, than for-profit CCPs do. Optimal capital requirements are derived for different levels of the clearing fees charged by for-profit CCPs. When this fee is low, the capital requirements incentivize CCPs to demand more collateral, thus bolstering financial stability. When fees are high, capital requirements do not change a CCP's incentives but serve to boost its loss-absorbing capacity.

 

Related Links

Keywords: International, PMI, Banking, Securities, CCPs, Financial Stability, Capital Requirements, BIS

Related Articles
News

BCBS Publishes Results of Survey on Proportionality in Bank Regulation

BCBS published a report presenting the results of a survey conducted on proportionality practices in bank regulation and supervision.

March 19, 2019 WebPage Regulatory News
News

US Agencies Adopt Interim Rule to Facilitate Transfers of Legacy Swaps

US Agencies (FCA, FDIC, FED, FHFA, and OCC) are adopting and inviting comments on an interim final rule.

March 19, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for March 2019

EBA published answers to seven questions under the Single Rulebook question and answer (Q&A) updates for this week.

March 15, 2019 WebPage Regulatory News
News

OCC Updates Recovery Planning Booklet of the Comptroller's Handbook

OCC updated the Recovery Planning booklet of the Comptroller’s Handbook.

March 15, 2019 WebPage Regulatory News
News

EBA Publishes Report on Convergence of Supervisory Practices Across EU

EBA published annual report on the convergence of supervisory practices in EU.

March 14, 2019 WebPage Regulatory News
News

CPMI-IOSCO Publish Update to Level 1 Assessment of PFMI Implementation

CPMI and IOSCO jointly updated the Level 1 Assessment Online Tracker on monitoring of the implementation of the Principles for financial market infrastructures (PFMI).

March 14, 2019 WebPage Regulatory News
News

Agustín Carstens of BIS Speaks About New Role of Central Banks

While speaking at the 20th anniversary conference of the Financial Stability Institute (FSI), Agustín Carstens, the General Manager of BIS, highlighted the need for regulatory actions in light of the continued evolution of financial technology.

March 14, 2019 WebPage Regulatory News
News

ESMA Analyzes Impact of Regtech and Suptech for Markets and Regulators

ESMA published the results of its analysis of the regulatory and supervisory technologies—also known as regtech and suptech—being developed in response to various demand and supply drivers in the financial sector.

March 14, 2019 WebPage Regulatory News
News

PRA Publishes Policy Statement on Group Supervision Under Solvency II

PRA published a policy statement (PS9/19) that provides feedback on responses to the consultation paper CP15/18 and the final supervisory statement SS9/15 (Appendix) on group supervision under Solvency II.

March 14, 2019 WebPage Regulatory News
News

ECB Announces Start Date for Euro Short-Term Rate

ECB announced that it will start publishing the euro short-term rate (€STR) as of October 02, 2019, reflecting the trading activity of October 01, 2019.

March 14, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2759