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 “Bank run Vs CCP run”

Collateral and Clearing

A few good articles are up on the topics of collateral and clearing:   images

This article on Bloomberg highlights the fact that banks will be prepared to use the cheapest collateral possible, regardless of quality. That could of course have quite an impact on the objective of “systemic risk reduction”.

Similarly this article in IFR looks at the looming rules on Initial Margin on uncleared trades. If widely applied, it could discourage hedging by end users, thus also negating the desired system risk reduction of the rules.  Continue reading “Collateral and Clearing”

Central Counterparty Clearing (CCP) some thoughts from Bank of Englnad

The Bank of England has released two papers on CCPs, which explain lossallocation rules, and how to balance the costs Aof default resources with the expected losses.
Paper 19, titled: “Central counterparties and their financial resources—a numerical approach”, maintains that new regulatory standards have required central counterparties to have robust processes in place to mitigate their counterparty credit risk exposures.
“At the same time, the standards allow CCPs to tailor their risk management models. This paper considers how CCPs can optimally determine the relative mix of initial margin and default fund contributions in a stylised setting, by balancing the costs of default resources with the expected losses they protect against,” .  Continue reading “Central Counterparty Clearing (CCP) some thoughts from Bank of Englnad”

Bilateral vs Multilateral netting : The Central clearing of OTC Derivatives


Rama cont and Thomas Kokholm have published a paper We study the impact of central clearing of over-the-counter (OTC)transactions on counterparty exposures in a market with OTC transactions across several asset classes with heterogeneous characteristics.

The impact of introducing a central counterparty (CCP) on expected interdealer exposure is determined by the tradeoff between multilateral netting across dealers on one hand and bilateral netting across asset classes on the other hand. Continue reading “Bilateral vs Multilateral netting : The Central clearing of OTC Derivatives”

Derivates : The Risk is shifting to CCPs

At the annual general meeting of the International Swaps and Derivatives Association in Singapore concluded

June's multi-colored eyes

yesterday,a group of panelists highlighted the lack of clarity over resolution for failed Central counterparty (CCPs) as a significant concern for the G20 objectives of eliminating systemic risk.

Central counterparty clearers stand to be the next “too-big-to-fail” institutions and could pose an acute threat to the
financial system if regulators stall on plans to manage the potential failure of a clearing entity.

There are two main processes that are carried out by CCPs: Continue reading “Derivates : The Risk is shifting to CCPs”