Imperial College London
Alternate

ProfessorRamaCont

Faculty of Natural Sciences, Department of Mathematics

Visiting Professor
 
 
 
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Contact

 

+44 (0)20 7594 0802r.cont Website

 
 
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Location

 

806Weeks BuildingSouth Kensington Campus

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Summary

 

Publications

Citation

BibTex format

@article{Cont:2015,
author = {Cont, R},
journal = {Journal of Risk Management in Financial Institutions},
pages = {365--389},
title = {The end of the waterfall: Default resources of central counterparties},
url = {http://hdl.handle.net/10044/1/27442},
volume = {8},
year = {2015}
}
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RIS format (EndNote, RefMan)

TY  - JOUR
AB  - Central counterparties (CCPs) have become pillars of the new global financial architecture following the financial crisis of 2008. The key role of CCPs in mitigating counterparty risk and contagion has in turn cast them as systemically important financial institutions whoseeventual failure may lead to potentially serious consequences for financial stability, andprompted discussions on CCP risk management standards and safeguards for recovery andresolutions of CCPs in case of failure. We contribute to the debate on CCP default resourcesby focusing on the incentives generated by the CCP loss allocation rules for the CCP and itsmembers and discussing how the design of loss allocation rules may be used to align theseincentives in favor of outcomes which benefit financial stability. After reviewing theingredients of the CCP loss waterfall and various proposals for loss recovery provisions forCCPs, we examine the risk management incentives created by different ingredients in theloss waterfall and discuss possible approaches for validating the design of the waterfall.We emphasize the importance of CCP stress tests and argue that such stress tests need toaccount for the interconnectedness of CCPs through common members and cross-marginagreements. A key proposal is that capital charges on assets held against CCP Default Fundsshould depend on the quality of the risk management of the CCP, as assessed throughindependent stress tests.
AU  - Cont,R
EP  - 389
PY  - 2015///
SN  - 1752-8887
SP  - 365
TI  - The end of the waterfall: Default resources of central counterparties
T2  - Journal of Risk Management in Financial Institutions
UR  - http://hdl.handle.net/10044/1/27442
VL  - 8
ER  -
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