How Safe are Central Counterparties in Derivatives Markets?
نویسندگان
چکیده
We propose a general framework for estimating the vulnerability to default by a central counterparty (CCP) in derivatives markets. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the U.S. credit default swaps market under shocks that are similar in magnitude to the Federal Reserve’s stress tests. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.
منابع مشابه
Margining in derivatives markets and the stability of the banking sector
We investigate the effects of margining, a widely-used mechanism for attaching collateral to derivatives contracts, on derivatives trading volume, default risk, and on the welfare in the banking sector. First, we develop a stylized banking sector equilibriummodel to develop some basic intuition of the effects of margining. We find that a margin requirement can be privately and socially sub-opti...
متن کاملValuation in Over-the-Counter Markets
We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and ...
متن کاملAustralian Banks’ Activities in Derivatives Markets: Products and Risk-Management Practices
In March of this year the Bank circulated a questionnaire on derivatives to all 38 banks operating in the Australian market. The questionnaire sought information on the products being traded by banks, the maturity composition of banks’ derivatives portfolios and banks’ counterparties. Information was also sought on banks’ strategies in derivatives markets, and on their risk-management practices...
متن کاملHedge Funds : What Do We Know ?
hile hedge funds have been around since at least the 1940s, it has been only in the last decade or so that they have attracted widespread attention. Investors—mainly well understood by their own investors, much less by their bankers and derivatives counterparties. LTCM had managed to build up so much leverage both onand off-balance sheet that when their investments soured they were unable to me...
متن کاملLet’s Make It Clear: How Central Counterparties Save(d) the Day (First Quarter 2010 Business Review)
*The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. he bankruptcy of Lehman Brothers in 2008 will certainly be featured in history books as one of the greatest financial failures so far, but it will also be recorded as yet another episode of the historically successful performance...
متن کامل