With the recent advent of the EMIR legislation in the European Union and the passage of the Dodd-Frank Act in the U.S., central counterparties (CCPs) have been enshrined by competent authorities as a preferred way to manage systemic risk and in particular guard against the potential consequences of a major bank default or market event.
The full implications of the central counterparty solution are beginning to emerge, and there are some surprising and unintended implications. The goal of this paper is therefore to highlight some of these consequences and encourage industry debate around them.
Table of Contents
OVERVIEW
1 CCPS AND THE REPO MARKETS
2 CENTRAL BANK ACCESS
CCPs need to deposit cash at a central bank during a crisis
3 REPO CONSIDERATIONS
CCPs need the ability to repo government paper directly with the central bank for cash
4 CENTRAL BANK ACTIONS
Quantitative easing makes it difficult for CCPs to manage margin levels without being procyclical
5 SKIN-IN-THE-GAME
Increasing CCP Skin-in-the-Game will inevitably increase clearing costs
The full white paper can be found here.