Journal of Financial Market Infrastructures

Central counterparties: magic relighting candles?

Dermot Turing

  • CCPs’ end-of-waterfall rules allow for limited refinancing.
  • Clearing members wishing to exit will still have to pay.
  • Creditors’ remedies (bankruptcy) are unlikely to be available.
  • Official policy expects CCPs to revive, but CCP rules may not enable that.

Central counterparties (CCPs) that exhaust available financial  resources when managing a major default have limited options. In this paper, the rules of selected major CCPs (LCH, CME, Eurex and ICE) are reviewed for both their end-of-waterfall procedures and the rights granted to clearing members in end-of-waterfall  scenarios. These are compared against the arrangements for and resolution policies of CCPs. CCPs have arrangements  to boost their financial position even at the end of the waterfall, but these are limited in scope, reflecting clearing members’ concerns about unlimited liability. However, it is difficult to put CCPs into a formal insolvency process as well as complex  for members to leave a failing CCP. The twin policies of mandatory clearing of over-the-counter derivatives and reviving CCPs post-default may conflict with the rules of CCPs. A revised policy approach is advocated.

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