A CCP is a CCP is a CCP

Robert T. Cox and Robert S. Steigerwald

Abstract

Central counterparties (CCPs) are important  financial  market infrastructures. The orderly risk management operations and financial resilience of CCPs and other market infrastructures  are essential for financial stability. Regulators and other policy makers face a major challenge in constructing appropriate regulatory frameworks for central clearing. The challenge of establishing standards for CCP risk management and resilience is made even more difficult by policy makers’ tendency to view CCPs through the lens of bank regulation.  This paper discusses the many differences between  CCPs and banks as well as the significance of these differences. In particular, we focus on differences in the roles that capital and collateral play in connection with CCP and bank risk management. From this discussion, we draw the following pol- icy conclusions. First, a CCP’s capital cannot be the primary (or even a significant) resource for loss absorption without fundamentally altering the incentive structure embedded in the default waterfall, if not the business model of the CCP itself. Second, capital analysis alone tells us little or nothing about the resilience of a given CCP or its ability to recover from threats to its viability. Third, resolution planning for CCPs must focus on features that are unique to central clearing.