Static Models of Central Counterparty Risk


Samim Ghamami
Federal Reserve Board

Wednesday, February 19, 2014
4:15 - 5:15 PM


Abstract:

The 2009 G20 clearing mandate has increased the importance of central counterparty (CCP) risk management substantially. International standard setting bodies have outlined a set of principles for CCP risk management; they have also devised CCP risk capital requirements on clearing members for their central counterparty exposures. There is still no consensus among CCP regulators, bank regulators, and CCPs on how central counterparty risk should be measured coherently in practice. A conceptually sound and coherent definition of the CCP risk capital in the absence of a unifying CCP risk measurement framework may not be possible. Incoherent CCP risk capital requirements can create an obscure environment for central clearing that may subsequently disincentivize the clearing mandate. Based on novel applications of well known mathematical models in nance, this paper introduces a model-based framework for the default waterfall resources of typical derivatives CCPs. The proposed CCP risk measurement framework can be viewed as a common ground for CCPs, their direct clearing members, bank regulators, and CCP regulators. It can be used for a risk sensitive model-based denition of CCP risk capital based on which less risk sensitive methods can be developed and evaluated.

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