Journal of Financial Market Infrastructures

Central counterparty resolution: an unresolved problem

Manmohan Singh and Dermot Turing

  • CCP resolution proposals are closely modelled on the resolution toolkit for banks, but most are shown to be unworkable in CCP endgame scenarios.
  • Variation Margin Gains Haircutting (VMGH) is the most viable tool.
  • As the overriding objective of CCP resolution is continuity of clearing, even VMGH has limitations, which may lead to a taxpayer bailout in some scenarios.
  • Alternative tools could reduce the risk of that unwanted outcome.

Recovery and resolution regimes are being developed for central counterparties (CCPs). We analyze current resolution tools in the context of policy designed to restore the critical functions of a failed CCP. We conclude that the tool kit is insufficient to avoid the costs of resolution being borne by taxpayers, and propose alternative policy suggestions for addressing the problem of a failed CCP.

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