Central Counterparty Default Waterfalls and Systemic Loss

Abstract Central counterparty (CCP) default waterfalls act as the last lines of defense in over-the-counter markets by managing and allocating resources to cover payment defaults. This article examines impact variations waterfall design on financial system losses presence network dependencies frictions cleared noncleared portion system. Through development a structural model, we draw several theoretical conclusions about effectiveness CCP under severe stress. These findings are empirically quantified testing model using supervisory data for U.S. credit swap market.