The end of the waterfall : default resources of central counterparties

CONTENTS

0. Summary

1. CCPs: bulwarks against systemic risk or new Too Big To Fail entities?

2. Provisioning for default losses: the CCP loss waterfall

3. Margin requirements

• 3.1 Backtesting of margin requirements
• 3.2. Procyclicality of margin requirements
• 3.2. Exposures to worst-case scenarios and portfolio crowding
• 3.3 Accounting for liquidation costs

4. Mutualizing default losses: the CCP Default Fund

• 3.1. Size of the Default Fund
• 3.3 Allocation of Default Fund contributions across Clearing Members

5. CCP capital and “skin-in-the-game”

• 5.1. Capital requirements for CCPs
• 5.2 Skin-in-the-game

6. Assessing a CCP’s default resources

• 6.1 Stress testing of CCP default resources
• 6.2 Beyond single-CCP stress-tests: accounting for interconnectedness:
• 6.3 How risky are CCP Default Funds?
• 6.4 How reliable are unfunded default resources?

7. The end of the waterfall : recovery mechanisms for CCPs

• 7.1 Variation Margin Haircuts (VMGH)
• 7.2 Liquidity provision during recovery
• 7.3 Contract tear-ups
• 7.4. Should ‘initial margin’ be used to fund a CCP’s recovery?

8. When all else fails: failure resolution of CCPs