Tag counterparty risk
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… Continue Reading →
In a recent post, we discussed the Oehmke and Zawadowski (2017) paper. The authors identify hedging, speculation, and arbitrage as the main CDS trading motives. We now zoom in on one of these motives: hedging. The article “Mitigating Counterparty Risk”… Continue Reading →
The financial crisis 2007/2008 again revealed that counterparty risk is front and center in financial markets. A consequence of counterparty risk: reliable market participants, with a low default probability, can require extra compensation for trading with riskier counterparties – at… Continue Reading →
What is the relation between central clearing and counterparty risk? Intuitively, it seems clear that a central clearing counterparty (CCP) improves the netting mechanism. With bilateral clearing, two trading partners can only net with one another. With central clearing, the… Continue Reading →
Why the discussion about central clearing of credit default swap (CDS) contracts? For one thing, central clearing increases transparency. Once transactions have to go through a central clearing counterparty (CCP), the regulator can simply monitor the CCP to get an… Continue Reading →