I want security: stylized facts about central counterparty collateral and its systemic context

David Murphy, Henry Holden and Melanie Houllier

Abstract

ABSTRACT

Collateralization is a ubiquitous feature of the postcrisis financial system. One of the reasons for this is the growth of central clearing, as central counterparties (CCPs) require their clearing members to post margin. Thanks to the recent disclosure standards for CCPs promulgated by regulators, data has become available on the collateral holdings and risk management policies of leading CCPs. We present a summary of this data and use it to motivate a discussion on some of the systemic risks of the now highly collateralized derivatives market. In particular, the "collateral system", which provides margin for posting by clearing members, and which CCPs use to invest posted cash, is analyzed, and some of the consequences of compulsory collateralization for risk transmission are discussed. The paper ends with a consideration of the advantages and disadvantages of broad collateral eligibility criteria.