Capital Requirements for Over-the-Counter Derivatives Central Counterparties

January 8, 2013

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Format: Chicago

Li Lin, and Jay Surti. Capital Requirements for Over-the-Counter Derivatives Central Counterparties, (USA: International Monetary Fund, 2013) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The central counterparties dominating the market for the clearing of over-the-counter interest rate and credit derivatives are globally systemic. Employing methodologies similar to the calculation of banks’ capital requirements against trading book exposures, this paper assesses the sensitivity of central counterparties’ required risk buffers, or capital requirements, to a range of model inputs. We find them to be highly sensitive to whether key model parameters are calibrated on a point-in-time versus stress-period basis, whether the risk tolerance metric adequately captures tail events, and the ability—or lack thereof—to define exposures on the basis of netting sets spanning multiple risk factors. Our results suggest that there are considerable benefits from having prudential authorities adopt a more prescriptive approach to for central counterparties’ risk buffers, in line with recent enhancements to the capital regime for banks.

Subject: Banking, Central counterparty clearing house, Credit default swap, Currencies, Econometric analysis, Financial markets, Financial regulation and supervision, Hedging, Money, Vector autoregression

Keywords: Capital, Central counterparties, Central counterparty clearing house, Clearing OTC-CDS, Credit default swap, Currencies, Default fund, Derivatives position, Europe, Financial market, G-14 dealers, Global, Hedging, IM requirements, Initial margin, Interest rate, Interest rate derivative, Interest rate derivative contract, Market condition, Market value, Meeting CM default, OTC-D market, OTC-interest rate products, Overnight rate, Risk buffer, Vector autoregression, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/003
Stock No:

WPIEA2013003
ISBN:

9781475535501
ISSN:

1018-5941

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