Central counterparties (CCPs) perform a specialist function in financial markets by assuming the counterparty credit risk between buyers and sellers in order to protect each of them from the default of another. Their role has been increased following the crisis as it is now the intention that a number of classes of OTC derivatives be subject to mandatory central clearing. CCPs employ sophisticated risk management processes to monitor their exposures and ensure that they hold financial resources that would be sufficient to prevent them failing, even in extreme circumstances.
The design of this “Recovery and Resolution” regime for CCPs is currently being developed in the EU and this paper proposes three principles to guide its design.
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