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Central Counterparty Links and Clearing System Exposures

Author

Listed:
  • Nathanael Cox

    (Reserve Bank of Australia)

  • Nicholas Garvin

    (Reserve Bank of Australia)

  • Gerard Kelly

    (Reserve Bank of Australia)

Abstract

Links between central counterparties (CCPs) enable participants to clear positions in any linked CCP without needing to maintain multiple CCP memberships. While links enable exposure to be reduced by allowing netting across CCPs, CCPs become exposed to one another through the possibility of a CCP default. The change in system exposure resulting from these two effects has recently been of great interest to policymakers, and we assess this quantitatively using a straightforward extension of Duffie and Zhu (2011). Our model shows that CCP links can reduce overall system exposure in most plausible scenarios. This conclusion is robust to changes in assumptions about the nature of participants and their exposures, as well as to the existence of more than two linked CCPs.

Suggested Citation

  • Nathanael Cox & Nicholas Garvin & Gerard Kelly, 2013. "Central Counterparty Links and Clearing System Exposures," RBA Research Discussion Papers rdp2013-12, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2013-12
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    References listed on IDEAS

    as
    1. Daniel Heller & Nicholas Vause, 2012. "Collateral requirements for mandatory central clearing of over-the-counter derivatives," BIS Working Papers 373, Bank for International Settlements.
    2. Stacey Anderson & Jean-Philippe Dion & Héctor Pérez Saiz, 2013. "To Link or Not To Link? Netting and Exposures Between Central Counterparties," Staff Working Papers 13-6, Bank of Canada.
    3. John P Jackson & Mark J Manning, 2007. "Comparing the pre-settlement risk implications of alternative clearing arrangements," Bank of England working papers 321, Bank of England.
    4. Craig Pirrong, 2012. "Clearing and Collateral Mandates: A New Liquidity Trap?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 24(1), pages 67-73, March.
    5. Nicholas Garvin, 2012. "Central Counterparty Interoperability," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 59-68, June.
    6. Jürg Mägerle & Dr. Thomas Nellen, 2011. "Interoperability between central counterparties," Working Papers 2011-12, Swiss National Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    2. Ron Berndsen & Ronald Heijmans, 2017. "Risk indicators for financial market infrastructure: from high frequency transaction data to a traffic light signal," DNB Working Papers 557, Netherlands Central Bank, Research Department.
    3. Alexandra Heath & Gerard Kelly & Mark Manning, 2013. "OTC Derivatives Reform: Netting and Networks," RBA Annual Conference Volume (Discontinued), in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.),Liquidity and Funding Markets, Reserve Bank of Australia.
    4. Garratt, Rodney & Zimmerman, Peter, 2020. "Centralized netting in financial networks," Journal of Banking & Finance, Elsevier, vol. 112(C).
    5. Divya P Tolia-Kelly, 2020. "Affective nationalisms and race," Environment and Planning C, , vol. 38(4), pages 589-591, June.
    6. Xiaobing Feng & Haibo Hu, 2016. "CCP interoperability and system stability," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 27(03), pages 1-18, March.
    7. Rod Garratt & Peter Zimmerman, 2015. "Does central clearing reduce counterparty risk in realistic financial networks?," Staff Reports 717, Federal Reserve Bank of New York.

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    More about this item

    Keywords

    clearing; netting; financial stability; central counterparty;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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