Capital Requirements for Over-the-Counter Derivatives Central Counterparties
affiliation not provided to SSRN
International Monetary Fund (IMF)
IMF Working Paper No. 13/3
Abstract: The central counterparties dominating the market for the clearing of over-the-counter interest rate and credit derivatives are globally systemic. Employing methodologies similar to the calculation of banksâ€™ capital requirements against trading book exposures, this paper assesses the sensitivity of central counterpartiesâ€™ required risk buffers, or capital requirements, to a range of model inputs. We find them to be highly sensitive to whether key model parameters are calibrated on a point-in-time versus stress-period basis, whether the risk tolerance metric adequately captures tail events, and the ability â€” or lack thereof â€” to define exposures on the basis of netting sets spanning multiple risk factors. Our results suggest that there are considerable benefits from having prudential authorities adopt a more prescriptive approach to for central counterpartiesâ€™ risk buffers, in line with recent enhancements to the capital regime for banks.