Walker liquidating limited estate sale

22 Dec

An important lesson from this is that uniform margins are not a sufficient instrument for risk management.A CCP also needs to control the growth and the concentration of exposures (Cruz-Lopez et al. Potential instruments include member-specific margin adjustments and position limits.While they are designed to insulate investors against counterparty risk, the central clearing counterparties themselves can fail.This column uses historical data to discuss how this can happen.Finally, we point toward some questions for future research.To improve financial stability after the Global Crisis, regulators have mandated the use of central clearing counterparties for standardised derivatives.Most importantly, our results suggest that risk-shifting problems can be important in CCPs.

Figure 1 Bilateral clearing (left panel) versus central clearing (right panel) (the red node represents the CCP) Thanks to regulatory changes, more than 70% of derivatives are now centrally cleared worldwide.In 2007-2008, most of derivatives trades were agreed over the counter, and settled bilaterally.The introduction of a CCP radically changes the structure of markets.Provided that the CCP has a negligible probability of default, counterparty risk should no longer be a concern, and markets can function smoothly.Figure 1 shows the radical shift in the structure of financial markets as a result of central clearing.