Systemic Risk with Multiple Central Counterparties

Thomas Hoppe Rosenlund & Jonas Barth-Stenersen

Student thesis: Master thesis

Abstract

This thesis studies nancial stability and cascading defaults within nancial networks with multiple central counterparties. We propose a multiple-CCP framework, which incorporates the cyclical interdependent nature of interbank payments and enables the evaluation of systemic risk in di erent network structures. As part of the framework we propose an algorithm, similar to the ctitious default algorithm of Eisenberg and Noe [2001], which simulates cascading defaults of CCPs and yields a unique clearing vector of interbank payments. Recent legislation of over- the-counter derivatives markets has incentivized the existence of multiple CCPs. In order to illustrate the use of the proposed framework we apply it to the market for single-name OTC credit default swaps, illustrating the trade-o between bilateral and multilateral netting. We show that the network with a single CCP outperforms the network without central clearing as well as those of multiple CCPs in terms of the chosen systemic risk measure. We nd that introducing an additional CCP to a network where central clearing already applies increases systemic risk.

EducationsMSc in Mathematics , (Graduate Programme) Final Thesis
LanguageDanish
Publication date2015
Number of pages155