Systemic Risks in CCP Networks

TL;DR

This paper introduces a comprehensive model for systemic credit and liquidity risks in CCP networks, capturing complex interactions and feedback effects among market participants and assessing potential loss distributions and risks.

Contribution

It presents a novel network-based risk model that incorporates feedback loops, participant heterogeneity, and dynamic margining to better understand systemic risks in CCP systems.

Findings

Identifies wrong-way risks between defaults and market turbulence

Analyzes loss distribution to default funds and liquidity needs

Highlights systemic vulnerabilities in CCP networks

Abstract

We propose a model for the credit and liquidity risks faced by clearing members of Central Counterparty Clearing houses (CCPs). This model aims to capture the features of: gap risk; feedback between clearing member default, market volatility and margining requirements; the different risks faced by various types of market participant and the changes in margining requirements a clearing member faces as the system evolves. By considering the entire network of CCPs and clearing members, we investigate the distribution of losses to default fund contributions and contingent liquidity requirements for each clearing member; further, we identify wrong-way risks between defaults of clearing members and market turbulence.