Systemic Risk in Markets with Multiple Central Counterparties

Central clearing has become a key feature of global derivatives markets following the Great Financial Crisis, altering the shape of financial networks. In centrally cleared markets, a central counterparty (CCP) sits at the centre, becoming the buyer to every seller and the seller to every buyer. In practice, however, derivatives clearing is characterised not by a single CCP, but by a small set of them. Importantly, a limited number of large banks link these CCPs together, representing the joint clearing membership that together accounts for the lion’s share of clearing volumes.

This BIS paper analyses the role of the joint clearing membership at multiple CCPs for stress transmission and financial stability. First, the authors develop a framework to quantify payment shortfalls in centrally cleared markets with multiple CCPs and identify the different roles of joint clearing members for loss transmission. Furthermore, they show how one CCP’s stress mitigation mechanisms can have spillover effects on other CCPs. The authors also complement existing empirical evidence for CCP interconnectedness via joint clearing membership by analysing data from the interest rate and credit default swaps markets. Third, policy implications for stress testing central counterparties are discussed