CCPs need thicker skins - Citi analysis

In the absence of regulatory requirements, CCPs are putting a tiny amount of their own capital into default waterfalls – equivalent to just 2.6% of the combined guarantee funds of the five biggest swaps clearers. Here, clearing specialists at Citi outline an analytical approach to calculating CCP skin-in-the-game

As the volume of over-the-counter derivatives trades being processed by central counterparties (CCPs) has surged in recent years, another important number has remained largely static – the contribution clearers make to their default waterfalls. At the leading OTC CCPs, so-called ‘skin in the game' (Sig) stands at 2.6%, on average, of their combined guarantee funds (table 1).

While CCPs are held to stringent regulatory risk management standards for both initial margin calculation and overall