Central Counterparties Help, But Do Not Assure Financial Stability

With E. Saeidinezhad,  Jul. 2017. 

Chinese version in Financial Market Research, NAFMII, Sept 2017
Key observations: 1. Central counterparties (CCPs) provide derivative markets with benefits of multilateral netting and better collateralization, assurances of trade finality and settlement, and help bolster the market integrity. 2. Strengthening CCPs is a necessary but hardly sufficient condition to ensure financial system stability. Macroprudential policy should supplement the work of CCPs with attentive monitoring and rapid resolution procedures: § Market liquidity conditions must be monitored vigilantly to ensure effective price discovery and market continuity. Regulators and supervisors must stand ready to support illiquid financial intermediaries if CCPs and markets threaten to seize. § A fast and certain recovery and resolution procedure of a failed CCP is essential. It would facilitate the CCP’s recapitalization and its ability to resume its function within the financial system.