Clearing Members Well Equipped to Meet CCP Assessments, Despite Likely Resource Depletion Under Stress

Views and opinions expressed are those of the authors and do not necessarily represent official positions or policy of the Office of Financial Research (OFR) or U.S. Department of the Treasury.

Central counterparties (CCPs) manage risks in a variety of derivatives, securities, and short-term funding markets. In principle, defaults on contracts like these can occur. If they do, the CCP takes responsibility for the contract and allocates any default losses. To cover potential losses, CCPs require clearing members (CMs) to set aside resources that serve as buffers. If default losses exhaust these (and other) resources, CCPs may issue capital calls to CMs. CMs typically have significant resources and, under ordinary circumstances, can easily meet the demands of such capital calls. However, capital calls are likely to arrive during periods of market stress when CM resources are already depleted. This raises the question of whether the CMs have enough resources to cover their obligations to the CCP so that the CCP, in turn, can cover the default.

In their working paper, “The Impact of CCP Liquidity and Capital Demands on Clearing Members Under Stress,” John Heilbron, OFR Researcher, and Stathis Tompaidis, OFR Research Principal, evaluate available resources at CMs that are also large U.S. globally systemically important banks (G-SIBs). To understand whether CMs can cover a CCP’s demands, the authors studied 11 of the largest CCPs across the world and 6 CMs that are the largest U.S. financial institutions. To perform the analysis, they combine public and supervisory datasets.

The authors find that even when both the CCP and CMs experience stress, the largest CMs have enough capital and liquidity resources to meet CCP demands. A single CCP could demand as much as 6% and 3% of a CM’s outstanding liquid and capital resources, respectively. During extreme periods, however, this amount has been as high as 32% and 13% of the average CM’s liquid resources and capital resources, respectively. Adequate monitoring of these resources and further study will ensure that CCPs are prepared for extreme events, particularly during periods of systemic market stress.