An assessment of CCP resilience under the new regulatory framework using public data.

Summary In this work, the impact of EMIR agreements and other international guidelines (Principles for Financial Market Infrastructures, Key Attributes of Effective Resolution Regimes for Financial Institutions) on the resilience of financial markets is studied in terms of counterparty and systemic risk. Specifically, the work focuses on the resilience of Clearing Houses (CCPs), which are at the heart of the new financial system architecture. As part of the regulatory movement from derivatives to CCPs, counterparty risk has thus been transferred from bilateral markets to CCPs. It is therefore essential today to assess the systemic risks related to this transformation of the structure of the financial markets. After describing the functioning of CCPs and their regulatory framework, the role of the European cleared repo market as a channel for amplification of systemic risk is analyzed. Repurchase agreements are financial instruments for refinancing banks, accounting for a growing share of liquidity for financial institutions in Europe. A new dataset on haircut rates applied to government bonds by CCPs is presented. Its analysis shows that haircut rates on government bonds from peripheral countries have increased significantly in response to rising sovereign risk. Enfin, the procyclicality of haircut rates and the concentration of secured transactions indicate that the repo market could be a source of systemic risk in the Eurozone. The second part focuses on the financial resilience of CCPs and their members. Since the long-term resilience of a CCP depends on the strength of its member base, the ability of member bases to pay under normal and stressed scenarios is assessed. To protect themselves against participant default, clearinghouses have developed several risk management procedures: margins, mutual guarantee funds (default fund), and recovery tools (replenishment of mutual guarantee funds, taking a fraction of margin earnings, ). The prefinanced resources, recovery tools, and assessment powers of the most important European and American CCPs are studied afin order to assess the possible exposure of their members. Loss allocation rules and the impact of new resolution regimes on contingent liquidity are also considered. The analysis shows that under a stressed scenario (Hedge 2), the quality of the member base erodes significantly, compromising the ability of members to provide contingent liquidity and maintain clearinghouse resilience. Infin, all European CCPs are scrutinized using public data. New tools have been developed . they allow comparison of the activities of European CCPs, their degree of interconnectedness, and the liquidity risk faced by a CCP in its reinvestment activities. These tools make it possible to show that, in the event of a systemic crisis, several CCPs could pose severe problems for the stability of the financial system.