The Structure of Central Counterparty Clearing Networks and Network Stability

Abstract

This paper measures central counterparty (CCP) clearing-network risk as the probability that the maximum cleared exposure of a CCP to an individual clearing member is atypically large. Our analytical derivation of this probability uses the large deviations theory of rare events, and shows that the probability depends on the topology (i.e., the levels of tiering and concentration) of the clearing network. We also derive and compute a CCP's Maximum-Exposure-at-Risk and relate it to the rate function in the expression for the probability of the CCP's maximum exposure. Based on our analysis, we provide insight into how network structure affects the stability of CCP clearing networks, and show that the riskiness of a clearing network can be characterized by the levels of tiering and concentration in conjunction with the rate function of the maximum-exposure probability. We find that there does not exist a monotonic positive or negative association, however, between the rate function and tiering and concentration.

Keywords: central counterparty, large deviations theory, clearing, systemic risk, network analysis

JEL Classification: E58, G01, G18