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Tag Archive: CCP


Sharing an article from the Streetwise Professor –blog

Major banks are having major concerns about the risks associated with CCPs in the aftermath of a failure of  a Korean brokerage firm that resulted in the mutualization of losses on the KRX.  The firm failed due to a fat-finger error (puts? calls? whatever!) and its margins were insufficient to cover its trading losses.

This experience is making CCP member firms re-evaluate the risks of CCPs, the risk controls implemented by CCPs, and the incentives of CCPs to control risk.   They realize that CCPs do not eliminate counterparty risk so much as redistribute it.  They are concerned about the incentives that CCPs have to manage those risks unless they have substantial exposure to them (“skin in the game”).

But here’s the thing.  This particular sequence of events is exactly what CCPs are best suited to handle: the insuring of idiosyncratic risks.  In this instance, the idiosyncratic risk was an random operational error at a single brokerage. Continue reading

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swap-it-like-its-hot11They’rrrre baaack. It’s leveraged supersenior kids, but not as you know it. Specifically not as you know it because the new ones are not non-recourse on the leverage, so they have no gap risk for the seller. Now, there are some not-entirely-accurate statements going around about what is actually happening here, so let’s look.

How would you synthesize a leveraged supersenior position? Well, take the underlying CDO, and sell the junior for a fair price.
Then take the senior, put it in an SPV, and fund that vehicle by Continue reading

Bank run Vs CCP run

The term ‘run on a CCP’ has been bandied around a fair amount, but it isn’t entirely obvious what it means. Let me attempt to shine some light 813530onto the idea.

A run on a bank occurs when depositors withdraw deposits quickly. In the days before deposit insurance, bank runs from retail depositors were common as their money was genuinely at risk from bank failure. These runs were damaging as banks which were solvent but not sufficiently liquid (due to demand deposits funding term loans) could fail due to a run. These days, bank runs occur in the wholesale funding market: hence Gorton and Metrick’s influential paper about the run on repo in the 2008 crisis. These repo runs occur if wholesale funders refuse to carry on providing liquidityContinue reading

The key protection which CCPs have against counterparty credit risk is their default waterfall. They take margin from clearing members and imagestheir clients, and default fund contributions from clearing members, and use these amounts as a bulwark against losses should a clearing member default.

The different levels in the default waterfall – margin, CCP equity, default fund, default fund assessment rights, and so on – are accessed in sequence, much like the tranches of a CDO. Typically the defaulter’s margin and default fund are used first, then an amount of CCP equity is at risk, then the mutual default is used, and typically more default fund can then be called from surviving members. That is, the default waterfall starts off individual, with the defaulter (or rather their estate) paying, and then becomes mutual.  Continue reading

In a recently concluding submit at Risk‘s OTC Derivatives Clearing Summit in New York. Representatives from Goldman imagesSachs argued that :

“Regulators want capital and margin rules to encourage central clearing, but analysis suggests costs may currently be higher in the cleared world”

So what does he mean let’s try to look at the existing capital and margin rules may not encourage market participants to centrally clear their over-the-counter derivatives trades. The capital regime for both cleared and uncleared trades is still unsettled, as is the margin regime for transactions that remain bilateral, but regulators are keen to ensure the framework pushes trades towards central counterparties (CCPs). As things stand,costs may be higher in the cleared world, particularly for market participants that have a directional book of trades. Continue reading

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