Journal of Financial Market Infrastructures

Welcome to the March 2017 issue of The Journal of Financial Market Infrastructures.

In this issue we have three papers on central counterparties (CCPs) that deal with different yet relevant policy issues: procyclicality, liquidity risk stress testing and CCPs’ own financial resources.

In our first paper, “The recent crises and central counterparty risk practices in the light of procyclicality: empirical evidence”, Olga Lewandowska and Florian Glaser set out to find evidence for the widely held belief that a CCP’s margin requirements and collateral haircuts move in tandem with market stress. If this procyclical behavior of CCPs were true, it would have serious consequences, such as causing liquidity problems that would exacerbate a crisis. Using ten years’ worth of data from a CCP and the European Central Bank’s measure for market stress, the authors do not find a statistically significant (positive) correlation. Possible explanations for this result could be the material and persistent over collateralization by clearing members or the existence of a floor in the calculation of margin requirements.

In “A network model for central counterparty liquidity risk stress testing under incomplete information”, Max Wong Chan Yue, Patrick Ge Pei and Lam Xin Yee focus on liquidity stress testing using data from SGX, the Singapore Exchange and CCP. The network in this paper does not have the familiar “star-like” shape, with the CCP in the center and the clearing members connected to it. Here, the model is a bipartite graph, with clearing members on one side and derivative products on the other. This network is used to gain insight into the liquidity exposures and resources of a CCP and its clearing members under stress.

David Murphy’s “I’ve got you under my skin: large central counterparty financial resources and the incentives they create” is the third and final paper of the current issue. Its title alludes to so-called skin-in-the-game (SITG), which is usually the portion of a CCP’s own resources that is at risk when a clearing member defaults. The author discusses the different incentives of CCPs and clearing members with respect to SITG: CCPs want it to be as low as possible, while clearing members have greater confidence in the default waterfall if the CCP’s stake in it is larger. The model developed in the paper, which uses a single-period setup as well as a multiperiod one, suggests that the likely combined outcome of these incentives is an initial margin level that exceeds minimum regulatory requirements. Murphy therefore suggests introducing a regulatory minimum SITG as a policy recommendation.

CCP clearing remains high on the agenda of international standard-setting bodies such as the Financial Stability Board and the Committee on Payments and Market Infrastructures (CPMI) and the Board of the International Organization of Securities Commissions (IOSCO). The three papers on CCPs in this issue of The Journal of Financial Market Infrastructures are a good reflection of those work streams, and there is more to come: our next issue will be a special on CCPs!

I hope you enjoy this issue of The Journal of Financial Market Infrastructures.

Ron Berndsen
De Nederlandsche Bank and Tilburg University