Loss sharing in central clearinghouses: winners and losers

Derivatives markets boast a gross market value outstanding of nearly $20 trillion worldwide. Derivatives are mostly traded over the counter and, therefore, counterparty risk is one of the most important risks in derivatives markets. When counterparties fail to fulfill their obligations, default losses arise, such as during the 2007-08 financial crisis. In response to the crisis, regulators worldwide have advocated for the central clearing of OTC derivative transactions through central clearing counterparties, known as CCPs.