The systemic risks of OTC derivatives central clearing

Abstract

This paper examines the changes to systemic risk made by the introduction of over the counter derivatives central clearing. It discusses both the reductions in exposure brought about by the introduction of central counterparties (CCPs) as buffers between derivatives counterparties, and the risks posed by the potential for a CCP failure. In particular, this paper studies both the solvency risks whereby a CCP might sustain sufficient losses to be unable to continue operations, and liquidity risks whereby the failure of a CCP or one of its members may be caused by an inability to meet claims. Based on this analysis, possible mitigants are suggested to the principal systemic risks posed by central clearing.