ISDA highlights a selection of research papers on derivatives and risk management
Central Clearing and Risk Transformation
Rama Cont, Imperial College London
The report demonstrates that central clearing transforms counterparty risk into liquidity risk. While recent discussions have centered on the solvency of CCPs and capital requirements, the author argues that the main focus of risk management and financial stability analysis should be on the liquidity of clearing members and the liquidity resources of CCPs. Stress tests of CCPs and their clearing member should focus on liquidity stress testing: the focus should be on comparing the size of the potential liquidity shocks to clearing members with their liquidity buffers, rather than their equity. CCP recovery mechanisms should be centered not on maintaining a CCP’s operations at any cost but on avoiding financial instability and safeguarding the financial system.
The report provides an analysis of the interdependencies in central clearing, covering 26 central counterparties (CCPs) from 15 jurisdictions in North America, South America, Europe and Asia-Pacific. The analysis includes CCPs, their members and other financial institutions that are linked to CCPs such as custodians, settlement banks, credit and liquidity providers and investment counterparties. The data collection and analysis was as part of the work to strengthen the resilience, recovery and resolution of CCPs undertaken by the Financial Stability Board jointly with the Basel Committee on Banking Supervision, Committee on Payments and Markets Infrastructures, and International Organization of Securities Commissions.
Division of Economic and Risk Analysis of the US Securities and Exchange Commission
The report describes trends in primary securities issuance and secondary market liquidity and assesses how those trends relate to post-crisis regulatory reforms. It includes a survey and analysis of recent academic literature, as well as analyses based on publicly available databases and non-public regulatory filings. The report examines the issuance of debt, equity, and asset-backed securities, as well as activity and liquidity in U.S. Treasuries, corporate bonds, single-name credit default swaps (CDS), and bond funds. Specifically for CDS, the report points out that some measures of CDS market liquidity have remained stable or point to improvements, while other measures show a reduction in activity. Interdealer trade activity in CDS has declined after 2010, but dealer-customer activity has remained stable.