A dynamic model of central counterparty risk

DOI10.1142/S0219024918500504MaRDI QIDQ4645328zbMATH OpenOpenAlexFDO

Authors Tomasz R. Bielecki, Igor Cialenco, Shibi Feng

Publication date 10 January 2019

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1803.02012

zbMATH Keywords

central clearing partiescredit default swapcredit migrationdefault funddefault waterfalldynamic risk measureinitial marginMarkov structures

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Credit risk (91G40) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: We introduce a dynamic model of the default waterfall of derivatives CCPs and propose a risk sensitive method for sizing the initial margin (IM), and the default fund (DF) and its allocation among clearing members. Using a Markovian structure model of joint credit migrations, our evaluation of DF takes into account the joint credit quality of clearing members as they evolve over time. Another important aspect of the proposed methodology is the use of the time consistent dynamic risk measures for computation of IM and DF. We carry out a comprehensive numerical study, where, in particular, we analyze the advantages of the proposed methodology and its comparison with the currently prevailing methods used in industry.

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Cited in

(13)

• Counterparty risk, central counterparty clearing and aggregate risk
• Dynamic investment and counterparty risk
• Simulating liquidity stress in the derivatives market
• Fair estimation of capital risk allocation
• XVA metrics for CCP optimization
• Hidden illiquidity with multiple central counterparties
• Dynamic analysis of counterparty exposures and netting efficiency of central counterparty clearing
• Firm capital dynamics in centrally cleared markets
• Counterparty credit risk in a clearing network
• Counter-cyclical margins for option portfolios
• CCP auction design
• Systemic risk in markets with multiple central counterparties
• How safe are central counterparties in credit default swap markets?

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