Protecting the CCP Egg Basket

Originally published in Derivatives Intelligence on February 25, 2013.

The implementation of EMIR and the Dodd-Frank Act will mutualize large volumes of counterparty risk and, together with new requirements for trade reporting, will afford regulators a clearer view of where systemic risk is building up. However, following the taxpayer-funded bailouts of large parts of the banking industry, policymakers are increasingly focusing their attention on measures designed to decrease the likelihood of a major CCP failure and, more importantly, to ensure that when a CCP does fail, it causes minimal disruption to the financial system and minimal cost to taxpayers.

The Committee on Payment and Settlement Systems and the International Organisation of Securities Commissions have released proposed principles for financial market infrastructures, such as CCPs, containing recommend prudential measures for CCPs, covering their structure and organization, their management of credit and liquidity risk and procedures for managing clearing member defaults. In addition to measures such as the holding of adequate levels of financial resources ab initio, CCPs are required to develop strategies to replenish resources in a significant stress scenario.

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