‘Cover 2’ CCP reserve standard inadequate – study

Stress tests underestimate how twin member failure affects clearing house stability

Falling
Researchers say “Cover 2” fails to account for the network effects of a twin default

False assumptions about how crises spread mean that default funds in many clearing houses could be insufficient to protect against contagion during periods of extreme stress, new research claims.

Large clearing houses are supposed to hold resources capable of absorbing the simultaneous default of their two largest members. But this standard, known as “Cover 2”, fails to account for the likely impact of a twin default on the network of interbank exposures, weakening other clearing members and

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