Central Counterparties (CCP)
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Keywords
Central Counterparties ; CCPs ; Clearing ; Margin ; Default Waterfall Funds ; Default FundAbstract
In this dissertation we will present the central clearing concept mechanisms and how CCPs apply them to clearing members. We will describe how CCPs reduces interconnectedness when trades are novated at CCP through multilateral netting and which is the Central Counterparties (CCPS), Clearing Member (CMs) and client relationship. We will discuss the asset classes already cleared by CCPs and why the 2008 Global Financial Crisis caused many CCPs to broaden the range of products available for clearing, particularly OTC derivatives.
We will also define and explain how clearing members' contributions to CCPs, such as initial margin, variation margin, and default funds, protect market participants in the event of default, and how these funds are used. In the "CCP lines of Defense” methodology we will describe how CCPs use it in order to utilize their financial resources and cover the cost of a defaulting clearing member. When losses exceed the “Default Waterfall Funds” we will explain which loss allocation techniques like the Variation Margin Gains Haircutting (VMGH), or tear-ups are used in order to protect CCPs and clearing members. Moreover, we will present the advantages and disadvantages of CCPs and their main risks including liquidity, default and model risk.
Additionally, we will attempt to examine the effects of the Corona Crisis on the CCPs. More particularly we investigate how well CCPs reacted and performed despite the elevated volatility and large price movements together with the increase in clearing volumes. Finally, we will check the impact of the above factors to the CCPs margin and default fund contributions and the results of this impact in market participants.