IDEAS home Printed from https://ideas.repec.org/a/fip/fedhep/00023.html
   My bibliography  Save this article

The Goldilocks Problem: How to get Incentives and Default Waterfalls “Just Right”

Author

Listed:
  • Rebecca Lewis
  • John McPartland

Abstract

Regulatory reforms in the wake of the 2007?08 financial crisis have increased the focus on the systemic importance of central counterparties (CCPs), which guarantee the performance of their clearing members? financial contracts.1 This, in turn, has increased policymakers? and practitioners? focus on risk management at CCPs. A key component of any CCP?s risk-management strategy is the CCP?s default waterfall. The default waterfall stipulates the sequence of financial resources that a CCP can draw upon to cover the unsatisfied financial obligations of a defaulted clearing member. At the top of the waterfall are the margin and default fund contributions of the defaulting clearing member.The remainder of the waterfall comprises contributions from the CCP, known as skin-in-the-game, and contributions from clearing members. This article describes how the structure for these CCP- and member-funded tranches affects how the interests of CCPs, clearing members, and their prudential regulators are aligned.

Suggested Citation

  • Rebecca Lewis & John McPartland, 2017. "The Goldilocks Problem: How to get Incentives and Default Waterfalls “Just Right”," Economic Perspectives, Federal Reserve Bank of Chicago, issue 1, pages 1-13.
    • Handle: RePEc:fip:fedhep:00023
    as

    Download full text from publisher

    File URL: https://chicagofed.org/~/media/publications/economic-perspectives/2017/ep2017-1-pdf.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. The Editors, 2017. "Perspectives articles for," Business History, Taylor & Francis Journals, vol. 59(1), pages 1-3, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Melinda Friesz & Kira Muratov-Szabó & Andrea Prepuk & Kata Váradi, 2021. "Risk Mutualization in Central Clearing: An Answer to the Cross-Guarantee Phenomenon from the Financial Stability Viewpoint," Risks, MDPI, vol. 9(8), pages 1-19, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.

      Corrections

      All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedhep:00023. See general information about how to correct material in RePEc.

      If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

      If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

      If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

      For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lauren Wiese (email available below). General contact details of provider: https://edirc.repec.org/data/frbchus.html .

      Please note that corrections may take a couple of weeks to filter through the various RePEc services.

      IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.