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Opinion/Comment

Central counterparties — New uses for a century-old market mechanism

Allan D. Grody
Journal of Risk Management in Financial Institutions, 4 (2), 112-116 (2011)
https://doi.org/10.69554/JQDC1865

Abstract

Central counterparties have been the preferred mechanisms used to share the risk of funding financial instruments between financial institutions and between financial institutions and their customers. With the inevitable next crisis looming, regulators have turned to a century-old concept to do what no government wants to do — guarantee that enough capital will be there the next time markets collapse. To do this regulators and industry members are embedding central counterparty mechanisms into all manner of interconnected risk: securities lending; the repo markets; and the swaps, credit default swap (CDS) and other over-the-counter (OTC) derivatives markets. Will it be a better guarantee than the too-big-to-fail concept of governments? Will it work better than the living will doctrine that regulators are imposing on systemically important financial institutions to assist in their breakup? With more risk now concentrated in central counterparties the inevitable question arises, are those entities now too big to fail? This paper explores this question and suggests that innovations are to be expected in managing the risk of too-big-to-fail central counterparties.

Keywords: central counterparty; risk management; too big to fail; derivatives; payment and settlement; financial guarantee

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Author's Biography

Allan D. Grody is a founding board member of the Journal of Risk Management in Financial Institutions, founding professor (retired) of New York University’s graduate course in risk management systems, and founding partner (retired) of Coopers & Lybrand’s financial services consulting practice. He began his business career in General Electric’s finance business and later went on to hold increasingly responsible positions in investment management, the securities industry and international banking. He is President of Financial InterGroup Advisors and Financial InterGroup Holdings Ltd, and an advisory board member of ARC Best Practices Ltd.

Citation

Grody, Allan D. (2011, March 1). Central counterparties — New uses for a century-old market mechanism. In the Journal of Risk Management in Financial Institutions, Volume 4, Issue 2. https://doi.org/10.69554/JQDC1865.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 4 / Issue 2
© Henry Stewart
Publications LLP

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