Central Counterparties: Mandatory Central Clearing and Initial Margin Requirements for OTC Derivatives (The Wiley Finance Series) by Gregory Jon

Author:Gregory, Jon [Gregory, Jon]
Language: eng
Format: mobi
ISBN: 9781118891582
Publisher: Wiley
Published: 2014-06-24T23:00:00+00:00

Cliff edge and death spiral effects

No credit linkage in initial margins

Encourages smaller counterparties to be clearing members

No cliff edge and death spiral effects

Bad credits are subsidised (moral hazard)

Another related aspect to this is the linkage of haircuts to credit quality. This was illustrated quite clearly via the MF Global default. MF Global held US$6.4 billion of European sovereign debt (which was financed through repo trades). When, due to the declining credit risk of the issuers, haircuts on these assets were increased, this created a negative asset shock that helped to catalyse the decline of MF Global. Whilst CCPs should ideally increase haircuts to mitigate declining credit risk in such situations,11 there is a clear danger that it increases systemic risk, especially when done suddenly. Even if the CCP is better off from such a move (which is debateable since they may push the clearing member into default), it is unlikely that the market as a whole would benefit.

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