A systemic risk assessment of OTC derivatives reforms and skin‐in‐the‐game for CCPs

Sheri M. Markose, Simone Giansante, Ali Rais Shaghaghi

Research output: Contribution to journalArticle

Abstract

The G20 OTC (over-the-counter) derivatives reforms impose large collateral/liquidity demands on clearing members of Central Counterparty (CCP) clearing platforms in the form of initial margins, variation margins and contributions to the default fund. In Heath et al. (2016), it was shown how this introduces a trade-off between liquidity risk and solvency risk with the system manifesting considerable systemic risk from these two sources of risk while CCP penetration is at current levels. The authors extend this analysis to include the European Market Infrastructure Regulation (EMIR) skin-in-the-game requirements for CCPs, which aim to ameliorate the contributions to the default fund by clearing members and also to prevent moral hazard problems associated with the too-interconnected-to-fail (TITF) status of CCPs as more and more derivatives are centrally cleared. The authors provide a systemic
risk assessment of these features of the OTC derivatives reforms using network analysis based on 2015-end data on the derivatives positions for 40 globally systemically important banks (G-SIBs).
LanguageEnglish
Pages111-126
JournalFinancial Stability Review
Volume21
Issue numberApril 2017
StatusPublished - Apr 2017

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Systemic risk
Risk assessment
Derivatives
Margin
Penetration
Liquidity risk
Network analysis
Solvency
Trade-offs
Liquidity
Moral hazard

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A systemic risk assessment of OTC derivatives reforms and skin‐in‐the‐game for CCPs. / Markose, Sheri M.; Giansante, Simone; Rais Shaghaghi, Ali .

In: Financial Stability Review, Vol. 21, No. April 2017, 04.2017, p. 111-126.

Research output: Contribution to journalArticle

Markose, Sheri M. ; Giansante, Simone ; Rais Shaghaghi, Ali . / A systemic risk assessment of OTC derivatives reforms and skin‐in‐the‐game for CCPs. In: Financial Stability Review. 2017 ; Vol. 21, No. April 2017. pp. 111-126.
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