Featured Product

    OFR Paper Examining the Vulnerability of CCPs in Derivatives Market

    November 02, 2017

    OFR published a working paper that examines the likelihood that a central counterparty (CCP) will default after a severe credit shock. The paper used credit default swap (CDS) data to estimate the direct and indirect effects of a default by CCP in derivatives trades. The paper concludes that a CCP could be more vulnerable to failure than conventional stress tests have shown.

    The paper proposes a general framework for estimating the likelihood of default by central counterparties (CCP) in derivatives markets. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, the authors studied the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. The authors illustrate the approach for the CDS market under shocks that are similar in magnitude to the FED’s 2015 Comprehensive Capital Analysis and Review trading book shock. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.  

    The paper summarizes the protections that the CCP has in place to deal with defaults by its members and examines the way the Depository Trust & Clearing Corporation (DTCC) data is used to derive variation margin payment demands and failure probabilities under the CCAR shock. The paper then analyzes the Cover 2 standard in the context of the CCAR shock. This analysis suggests that the CCP’s default fund is adequate to cover the defaults of its two largest members; however, a different conclusion emerges when network contagion is taken into account. The paper introduces the contagion model, which traces how payment delinquencies by some firms can escalate as they cascade through the network of CDS exposures. The sensitivity of the model to different values for the shock and stress transmission parameters is also demonstrated. Next, the paper describes a probabilistic model that allows the estimation of the probability of a CCP failure relative to the probability of a member’s failure, while making minimal assumptions about the degree of correlation among member failure rates. This model was used to estimate the probability that a CCP would default during a stress of similar magnitude to the CCAR shock. 

     

    Related Link: Working Paper (PDF) 

    Keywords: Americas, US, Securities, CCP, CCAR, OTC Derivatives, CDS, Stress Testing, Systemic Risk, OFR

    Featured Experts
    Related Articles
    News

    MAS Amends Notice 610 on Reporting Templates for Banks in Singapore

    MAS published amendments to Notices 610 and 1003 related to submission of statistics and returns, along with the reporting templates and frequently asked questions (FAQs) associated with these Notices.

    January 24, 2020 WebPage Regulatory News
    News

    HKMA Updates Policy Module on Supervisory Review Process

    HKMA is issuing, by notice in the Gazette, revised versions of two Supervisory Policy Manual modules as statutory guidelines under section 7(3) of the Banking Ordinance. The Supervisory Policy Manual modules are CA-G-5 on “Supervisory Review Process” and SB-2 on “Leveraged Foreign Exchange Trading.”

    January 24, 2020 WebPage Regulatory News
    News

    PRA Amends Pillar 2 Capital Framework for Banks

    PRA published the policy statement PS2/20 that contains the final amendments to the Pillar 2 framework and provides feedback to responses to the consultation paper CP5/19 on updates related to Pillar 2 capital framework.

    January 23, 2020 WebPage Regulatory News
    News

    FED Proposes to Revise Information Collection Under Market Risk Rule

    FED proposed to revise and extend, for three years, FR 4201, which is the information collection under the market risk capital rule.

    January 22, 2020 WebPage Regulatory News
    News

    HKMA Consults on Stay Rules on Financial Contracts Under FIRO

    HKMA published proposals for making rules related to contractual stays on termination rights in financial contracts for authorized institutions under FIRO or the Financial Institutions (Resolution) Ordinance (Cap. 628).

    January 22, 2020 WebPage Regulatory News
    News

    MAS Amends Notices on Minimum Liquid Asset Requirements for Banks

    MAS published amendments to Notices 1015, 613, and 649 related to the minimum liquid assets (MLA) requirements.

    January 21, 2020 WebPage Regulatory News
    News

    APRA Publishes Submission on Fintech and Regtech

    APRA published its submission, to the Senate Select Committee, on financial technology and regulatory technology.

    January 21, 2020 WebPage Regulatory News
    News

    OSFI to Implement Operational Risk Capital Rules for Banks in Q1 2022

    OSFI decided to move domestic implementation of the revised Basel III operational risk capital requirements from the first quarter of 2021 to the first quarter of 2022.

    January 20, 2020 WebPage Regulatory News
    News

    ECB Consults on Guideline on Threshold for Credit Obligations Past Due

    ECB published a draft guideline, along with the frequently asked questions (FAQs), on the definition of the materiality threshold for credit obligations past due for less significant institutions.

    January 20, 2020 WebPage Regulatory News
    News

    OSFI Consults on Instruction Guide for Termination of Pension Plan

    OSFI is consulting on draft revisions to the instruction guide for termination of a defined benefit pension plan.

    January 20, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 4526