Systemic Risk in Markets with Multiple Central Counterparties

BIS Working Papers  |  No 1052  | 
21 November 2022



Central clearing has become a key feature of global derivatives markets following the Great Financial Crisis, altering the shape of financial networks. In centrally cleared markets, a central counterparty (CCP) sits at the centre, becoming the buyer to every seller and the seller to every buyer. In practice, however, derivatives clearing is characterised not by a single CCP, but by a small set of them. Importantly, a limited number of large banks link these CCPs together, representing the joint clearing membership that together accounts for the lion's share of clearing volumes.


We analyse the role of the joint clearing membership at multiple CCPs for stress transmission and financial stability. First, we develop a framework to quantify payment shortfalls in centrally cleared markets with multiple CCPs and identify the different roles of joint clearing members for loss transmission. Furthermore, we show how one CCP's stress mitigation mechanisms can have spillover effects on other CCPs. Second, we complement existing empirical evidence for CCP interconnectedness via joint clearing membership by analysing data from the interest rate and credit default swaps markets. Third, we discuss policy implications for stress testing central counterparties.


Joint clearing members can play an important role in how losses are transmitted between several CCPs, especially when realistic frictions affecting contagion are present. This highlights the need to incorporate these features into current CCP stress-testing practice. At the heart of current practice is the Cover-2 standard, which seeks to identify the two groups of clearing members that would lead to the largest shortfall of prefunded resources. We show that who the two top clearing members are varies significantly depending on whether one accounts for contagion effects stemming from interconnectedness through shared clearing membership. Our analysis can therefore serve as a tool to select stress scenarios in markets with multiple central counterparties.


We provide a framework for modelling risk and quantifying payment shortfalls in cleared markets with multiple central counterparties (CCPs). Building on the stylised fact that clearing membership is shared among CCPs, we show how this can transmit stress across markets through multiple CCPs. We provide stylised examples to lay out how such stress transmission can take place, as well as empirical evidence to illustrate that the mechanisms we study could be relevant in practice. Furthermore, we show how stress mitigation mechanisms such as variation margin gains haircutting by one CCP can have spillover effects on other CCPs. The framework can be used to enhance CCP stress-testing, which currently relies on the "Cover 2" standard requiring CCPs to be able to withstand the default of their two largest clearing members. We show that who these two clearing members are can be significantly affected by higher-order effects arising from interconnectedness through shared clearing membership. Looking at the full network of CCPs and shared clearing members is therefore important from a financial stability perspective.

JEL classification: C60, C62, G18, G21, G23. 

Keywords: Central counterparties, systemic risk, contagion, stress testing, Cover 2.