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Digital
Library of the European Council for Modelling
and Simulation |
Title: |
Together Forever Or
Separated For Life: Stress Tests Of Central Counterparties In Case Of Merged
And Separated Default Funds |
Authors: |
Ferenc
Illes, Kira Muratov-Szabo, Andrea Prepuk, Melinda Szodorai, Kata Varadi |
Published in: |
(2019). ECMS 2019
Proceedings Edited by: Mauro Iacono, Francesco Palmieri, Marco Gribaudo,
Massimo Ficco, European Council for Modeling and Simulation. DOI: http://doi.org/10.7148/2019 ISSN:
2522-2422 (ONLINE) ISSN:
2522-2414 (PRINT) ISSN:
2522-2430 (CD-ROM) 33rd International ECMS Conference on
Modelling and Simulation,
Caserta, Italy, June 11th – June 14th, 2019 |
Citation
format: |
Ferenc Illes, Kira Muratov-Szabo, Andrea Prepuk, Melinda Szodorai, Kata Varadi (2019). Together Forever Or Separated For Life: Stress Tests Of Central Counterparties In Case Of Merged And Separated Default Funds, ECMS 2019 Proceedings Edited by: Mauro Iacono, Francesco Palmieri, Marco Gribaudo, Massimo Ficco European Council for Modeling and Simulation. doi: 10.7148/2019-0078 |
DOI: |
https://doi.org/10.7148/2019-0078 |
Abstract: |
The role of the
central counterparties on the market is to take over the counterparty risk during
the trading on stock exchanges. To fulfill its role, a CCP needs to maintain
financial resources that can absorb losses in case of the default of a clearing
member. A default waterfall system is operated by CCPs, one of which element
is the default fund contribution by members. Our paper focuses on the default
fund design a central counterparty (CCP) operates and the stress test applied
to quantify the size of it. There is always a trade-off between the margin
requirements and the default fund regarding risk-sharing
and their sizes. Two possible designs are presented, therefore, our paper
analyses the default funds, and the cross-guarantee between CMs, from the
viewpoint of having a joint or separated default fund for different markets.
In the risk management system of several CCPs the size of the default fund is
linked to the result of the stress tests. Applying stress on the proposed
model, results show that from the market participants’ perspective that are
present only on the spot market a merged market is not in their favour, while
for those, who are present on both markets benefit from the merged markets.
From the CCPs point of view, on one hand the most prudent step to take is to
clear the markets separately, since the overall value of the guarantees would
be higher in this case, but on the other hand from competition point of view,
the lower margin and default fund values can strengthen a CCPs position in
acquiring and keeping clearing members. |
Full
text: |