Your skin or mine: Ensuring the viability of a central counterparty

Friesz, Melinda and Váradi, Kata ORCID: https://orcid.org/0000-0002-5939-2817 (2023) Your skin or mine: Ensuring the viability of a central counterparty. Emerging Markets Review, 57 . DOI https://doi.org/10.1016/j.ememar.2023.101074

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Official URL: https://doi.org/10.1016/j.ememar.2023.101074

Abstract

Through their clearing and settlement activity, central counterparties (CCP) ensure the stability of the financial system. They operate a multilevel guarantee system containing the initial margin requirements, the default fund contributions, and their own contribution, referred to as skin-in-the-game (SITG). Using a Monte-Carlo simulation method-based framework, the study examines how the value of SITG changes in different guarantee system settings, specifically through the implementation of a merged, separated, or partially separated guarantee system for interconnected markets. The primary objective is to quantify the minimum amount of SITG necessary for a CCP to protect non-defaulting members or to prevent the execution of the CCP's recovery and resolution plan. The findings indicate that a partially separated guarantee system is the most beneficial option for most stakeholders.

Item Type:

Article

Uncontrolled Keywords:

central counterparty, skin-in-the-game, default waterfall, Monte-Carlo simulation

JEL classification:

E44 - Financial Markets and the Macroeconomy
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

Divisions:

Institute of Finance

Subjects:

Finance

DOI:

https://doi.org/10.1016/j.ememar.2023.101074

ID Code:

9462

Deposited By:

MTMT SWORD

Deposited On:

25 Oct 2023 13:55