In recent years, an increased effort has been made to further the development of effective stress tests that can be used to quantify the resilience of financial institutions. Here, we propose a stress test methodology for central counterparties (CCPs) based on a network characterization of clearing members (CMs) that takes into account the propagation and amplification of financial distress through the network of bilateral exposures between CMs. We apply the proposed framework to the fixed-income asset class of Cassa di Compensazione e Garanzia (CC&G), the CCP operating in Italy, whose cleared securities are mainly Italian government bonds. We consider two different scenarios where exogenous losses may be incurred: a distributed initial shock and a shock corresponding with the cover 2 regulatory requirement (entailing the simultaneous default of the two most exposed CMs). Network effects turn out to substantially increase the vulnerability of the CMs in both scenarios, though distress propagation is much more rapid in the latter case, where we note a large number of early triggered additional defaults. This shows that setting a default fund to cover insolvencies on a cover 2 basis alone may not be adequate for the taming of systemic events. Overall, our network-based stress test methodology represents a refined tool for calibrating conservative default fund amounts.

Poce, G., Cimini, G., Gabrielli, A., Zaccaria, A., Baldacci, G., Polito, M., et al. (2018). What do central counterparty default funds really cover? A network-based stress test answer. THE JOURNAL OF NETWORK THEORY IN FINANCE, 4(4), 43-57 [10.21314/JNTF.2018.047].

What do central counterparty default funds really cover? A network-based stress test answer

Giulio Cimini
;
2018-01-01

Abstract

In recent years, an increased effort has been made to further the development of effective stress tests that can be used to quantify the resilience of financial institutions. Here, we propose a stress test methodology for central counterparties (CCPs) based on a network characterization of clearing members (CMs) that takes into account the propagation and amplification of financial distress through the network of bilateral exposures between CMs. We apply the proposed framework to the fixed-income asset class of Cassa di Compensazione e Garanzia (CC&G), the CCP operating in Italy, whose cleared securities are mainly Italian government bonds. We consider two different scenarios where exogenous losses may be incurred: a distributed initial shock and a shock corresponding with the cover 2 regulatory requirement (entailing the simultaneous default of the two most exposed CMs). Network effects turn out to substantially increase the vulnerability of the CMs in both scenarios, though distress propagation is much more rapid in the latter case, where we note a large number of early triggered additional defaults. This shows that setting a default fund to cover insolvencies on a cover 2 basis alone may not be adequate for the taming of systemic events. Overall, our network-based stress test methodology represents a refined tool for calibrating conservative default fund amounts.
2018
Pubblicato
Rilevanza internazionale
Articolo
Esperti anonimi
Settore FIS/02 - FISICA TEORICA, MODELLI E METODI MATEMATICI
Settore FIS/03 - FISICA DELLA MATERIA
English
https://www.risk.net/journal-of-network-theory-in-finance/6202581/what-do-central-counterparty-default-funds-really-cover-a-network-based-stress-test-answer
Poce, G., Cimini, G., Gabrielli, A., Zaccaria, A., Baldacci, G., Polito, M., et al. (2018). What do central counterparty default funds really cover? A network-based stress test answer. THE JOURNAL OF NETWORK THEORY IN FINANCE, 4(4), 43-57 [10.21314/JNTF.2018.047].
Poce, G; Cimini, G; Gabrielli, A; Zaccaria, A; Baldacci, G; Polito, M; Rizzo, M; Sabatini, S
Articolo su rivista
File in questo prodotto:
File Dimensione Formato  
1611.03782.pdf

solo utenti autorizzati

Descrizione: Pre-print
Licenza: Non specificato
Dimensione 766.93 kB
Formato Adobe PDF
766.93 kB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2108/234167
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 5
  • ???jsp.display-item.citation.isi??? 5
social impact