CCP Resolution Remains Unresolved

Manmohan Singh and Dermot Turing

Central counterparties (CCPs) are now at the centre of risk management in the financial markets. In the decade or so before the financial crisis, some CCPs had begun to accept “over-the-counter” (OTC) derivatives positions for clearing: that is to say that transactions in unorganised marketplace moved to CCPs. Those CCPs were judged to have performed well during the crisis, so one of the precepts which emerged in the post-crisis settlement was that clearing of standard OTC derivative products should be made mandatory.

It has more recently been acknowledged that the combination of mandatory clearing and concentration of counterparty risk into a central infrastructure increases the risk of failure of the infrastructure itself. This issue arises for the largest CCPs, which clear OTC derivative products in accordance with the new mandates, on which we focus.11 It is accepted that different failure scenarios and different outcomes may arise for smaller CCPs, such as those that clear domestically-issued equities only. This paper’s attention is only on the large OTC derivatives CCPs, which are systemically important for financial stability. Accordingly, policy attention has turned to

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