Moving from decentralized financial markets to central clearing has a systemic consequence. Central Clearing Counterparties (CCPs) become central “nodes” in the market participant network. If clearing members are only connected to the CCP via clearing, CCP risk management can focus on the well-known risk sources (e.g., default risk, counterparty exposure, market liquidity, or asset volatility). But clearing members effectively take on multiple roles: settlement bank, liquidity facility and so on. What are the (systemic) risk consequences of these multiple connections between clearing members and the CCP?
Multiple roles mean multiple risks
The Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructure (CPMI), Financial Stability Board (FSB), and International Organization of Securities Commissions (IOSCO) have summarized the current relations in their 2018 report “Analysis of Central Clearing Interdependencies”. They identify six different connections between financial market participants and CCPs: custodians, settlement banks, intraday liquidity / settlement line providers, credit and liquidity facilities, third-party investment managers, and investment counterparties. Table 1 gives an overview of how prevalent these conditions are.
| Clearing members that are also… | # | % |
| Clearing members | 306 | 100 |
| Custodians | 29 | 9.5 |
| Settlement banks | 59 | 19.3 |
| Intraday liquidity/settlement line providers | 49 | 16.0 |
| Credit/liquidity facilities | 82 | 26.8 |
| Third-party investment managers | 24 | 7.8 |
| Investment counterparties | 79 | 25.8 |
Table 1: Total and relative number of entities connected to any CCP by different kinds of financial service provision. Data taken from Fig. 1 and Fig. 2 of “Analysis of Central Clearing Interdependencies”.
Table 1 shows that especially clearing members especially act as providers of credit and liquidity, as investment counterparties, and as settlement banks. This adds a relevant risk dimension to the clearing relation.
Does size matter?
Are larger clearing members more active in providing services to CCPs? The positive correlation between cleared position size and financial service provision implies that the default of a large clearing member has a double impact: First, via a direct impact on the CCPs’ capital resources, and second, indirectly via the financial services relation. To quantify the joint impact, regulators analyze the “cover 2 scenario”: default of the two largest clearing member.
Take-away: Multiple risks
In summary, promoting CCP resilience must take the multiplicity of connections between the CCP and the clearing members into account.
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