Journal of Financial Market Infrastructures

Risk.net

“Closing the gaps: moving forward on tail risks in central clearing”: a central bank of issue perspective

Klaus Löber and Corinna Freund

  • Since the G20 agreement to introduce mandatory central clearing, much has been achieved in terms of enhancing safeguards for safe and efficient central clearing.
  • CCP resolution planning has not progressed as much as hoped, which creates significant risks in financial sector preparedness and could lead to undue reliance on a potential public sector bailout.
  • In order to move forward we all – public authorities and private sector alike – need to broaden our horizons with regard to the systemic nature of potential CCP resolution events.

Central counterparty (CCP) risk management has been a top priority since mandatory central clearing was introduced, given that increased systemic risk concentration needs to be accompanied by stronger safeguards. Although much has been achieved in recent years to improve CCP risk management, there is still much to be done, particularly on “end of waterfall” scenarios. This paper explains the priorities from a central bank of issue perspective for CCP recovery and resolution. It focuses on structural barriers to effective CCP resolution planning and suggests how the respective gaps could be overcome.

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