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18 December 2019

BIS: Central counterparty exposure in stressed markets


Authors propose a new way of monitoring the risk exposure of a central counterparty (CCP) towards its clearing members. For that, they track and break down changes in CCP exposure into price- and position-related factors.

In addition, they examine which of the members' accounts feature most prominently in shaping the total exposure in these circumstances: the house accounts, which tend to conduct leveraged trades and have little loss-absorbing capacity, or client accounts, where losses are more easily absorbed.

Authors contribute to a rapidly expanding literature on central clearing by proposing an approach to monitoring CCP exposure intra-daily. This approach is particularly useful in stressed markets, when trading is fast-paced and data come in rapidly. Their approach copes with such "big data" challenges and, in particular, sheds light on how the commonality of exposures across clearing members increases a CCP's overall exposure in stressed markets.

Authors find that the drivers of a CCP's overall exposure in stressed markets are fundamentally different from those in normal times.

For the first set of findings, they consider changes in CCP exposure. When these changes are of a typical size, they reflect almost entirely changes in the trading positions of clearing members. However, extremely large increases in CCP exposure tend to stem either from a spike in the volatility of security returns or from higher commonality of the exposures due to similar trading strategies, ie "crowding".

Second, they consider the level of CCP exposure. Again, they find that - in contrast to normal times - high levels stem mostly from crowding. More specifically, at times of market stress, the bulk of CCP exposure is concentrated in a few clearing members and a small set of risk factors.

Third, they find that the share of house accounts in CCP exposure remains roughly the same in stressed as in normal times. However, a larger share of the total house-account exposure stems from just a few clearing members.

Full working paper on BIS



© BIS - Bank for International Settlements


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