Journal of Financial Market Infrastructures

The distribution of clearing members’ risk exposure and how it matters

Olga Lewandowska and Edgar Mai

  • In this paper, we compared the data from three major clearing houses concerning tail losses and member concentration. The data was published by the clearing houses in line with the CPMI-IOSCO framework.
  • The concentration of initial margin let us put forward a hypothesis about the distribution of SLOIMs within the member base.
  • SLOIM, the expected stress loss less (over) initial margin measures the loss of resources at the CCP during a clearing member default. The SLOIM drives a priori the size of the default fund.
  • It is recommended that the clearing houses publish the data on SLOIM distribution. It would help the members and the regulators to assess the accuracy of the cover 2 principle in each clearing house and, if appropriate, take further measures.

Since 2015, central counterparties (CCPs) have published their Committee on Payments and Market Infrastructures–International Organization of Securities Commissions (CPMI–IOSCO) quantitative disclosures, providing insights into the risk concentrations within their member bases. The distribution of clearing members’ risk exposure has a major impact on the effectiveness of risk management in the CCP, including on default fund practices. This paper sheds light on the consequences of risk distribution within a member base and the adequacy of the cover 2 principle. In addition to CPMI–IOSCO disclosures from three CCPs, we utilize a novel data set that contains comprehensive information about historical margins in a leading clearing house.

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