Resolution of Failing Central Counterparties

19 Pages Posted: 2 Feb 2015

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Date Written: December 17, 2014

Abstract

A central counterparty (CCP) is a financial market utility that lowers counterparty default risk on specified financial contracts by acting as a buyer to every seller, and as a seller to every buyer. When at risk of failure, a CCP could be forced into a normal insolvency process such as bankruptcy, or an administrative failure resolution process. This chapter reviews some alternative approaches to the design of insolvency and failure resolution regimes for CCPs. I focus on the allocation of losses and the question of whether and how to provide for continuity of clearing services. I discuss how one might adapt to CCPs some of the failure resolution approaches currently being designed for other forms of systemically important financial institutions. A key policy question is when to interrupt a contractually based CCP default management process with an overriding failure resolution process.

Keywords: Central clearing, derivatives, central counterparties, failure resolutions

JEL Classification: G20, G28, G33

Suggested Citation

Duffie, James Darrell, Resolution of Failing Central Counterparties (December 17, 2014). Stanford University Graduate School of Business Research Paper No. 15-12, Available at SSRN: https://ssrn.com/abstract=2558226 or http://dx.doi.org/10.2139/ssrn.2558226

James Darrell Duffie (Contact Author)

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Canadian Derivatives Institute ( email )

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