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

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  • Friesz, Melinda
  • Váradi, Kata

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.

Suggested Citation

  • Friesz, Melinda & Váradi, Kata, 2023. "Your skin or mine: Ensuring the viability of a central counterparty," Emerging Markets Review, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:ememar:v:57:y:2023:i:c:s1566014123000791
    DOI: 10.1016/j.ememar.2023.101074
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    More about this item

    Keywords

    Central counterparty; Skin-in-the-game; Default waterfall; Monte-Carlo simulation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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