Non-Default Loss Allocation at CCPs
Abstract: In this paper, we answer three questions about the appropriate allocation of non-default losses at central counterparties (CCPs): 1) “Who should assume financial responsibility for a non-default loss?”, 2) “What portion of a non-default loss should each party pay?”, and 3) “How should CCPs and clearing members address catastrophic non-default losses?”. To answer the first question, we argue that financial responsibility should be shared among the parties whose decisions contributed to the loss. Determining whose decisions contributed to a loss requires an understanding of the type of loss involved. To answer the second question, we argue that the CCP and clearing members should establish a loss-sharing formula that takes into account the CCP’s ownership structure and the particular needs of the CCP and its clearing members. The third question concerns what we term catastrophic losses – losses so large that those responsible for absorbing them cannot do so. We argue that to address catastrophic losses, the CCP and clearing members should consider not the cause of the loss, but whether the value of continuing the CCP’s operations justifies covering it.
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Provider: Federal Reserve Bank of Chicago
Part of Series: Policy Discussion Paper Series
Publication Date: 2017-04-01