Home » Regulation » Think of Central Clearing Counterparty Risk For Your OTC Positions Like an Unconventional CDO

Think of Central Clearing Counterparty Risk For Your OTC Positions Like an Unconventional CDO

Dr David Murphy, RegTech, EMIR’s burning question: How risky are OTC derivatives CCPs? here. nice. I had it booked as P but now it’s PIKing.

No financial institution likes to remind its clients that it might fail, so it is no surprise that OTCderivatives clearing houses don’t heavily advertise their risks.  But they are risky.  A clearing house could fail in at least three different ways: 1) One or more clearing members could default, and the resulting losses could blow through the CCP’s financial resources; 2) The clearing house could suffer investment losses comparable to its capital; 3) It could have a large operational risk event which made it insolvent.

The risk of the first type of loss event is a counterparty credit risk question.  One tool that we can use to answer it is CDO pricing technology.  Here’s how it works:

Jacob Bunge, WSJ, BATS, Direct Edge in Talks to Merge, here.

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