CCPs should pay twice into default waterfall, say researchers

Chicago Fed paper calls for contributions before members’ capital is tapped and after it is depleted

Two-tranche model would put some CCP capital at risk before the waterfall starts to draw on the default fund

Central counterparties (CCPs) should contribute twice to the cost of covering a member default, argue researchers at the Federal Reserve Bank of Chicago.

Financial markets analyst Rebecca Lewis and senior policy adviser John McPartland compared the order of payments in the event of default – the ‘default waterfall’ – at 17 major CCPs in the UK, EU and US in a paper due to be published in the Journal of Financial Market Infrastructures later this year. They conclude that CCPs should contribute