Limiting taxpayer “puts†: an example from central counterparties

ABSTRACT Nonbanks such as central counterparties (CCPs) are a useful lens through which to see how regulators view the role of the lender of last resort (LOLR). This paper explores the avenues that are available when a nonbank failure is likely, specifically the option of keeping CCPs afloat. We argue that CCPs have, by regulatory fiat, become "too important to fail". Thus, the imperative should be greater loss-sharing by all participants that better aligns the distribution of risks and rewards of CCPs, the clearing members and derivative end users. In the context of LOLR, the proposed variation margin gains haircut is discussed as a way of limiting the taxpayer put.