Beyond Clearing

Central counterparties (CCPs) have become pivotal to financial stability in the post-Global-Financial-Crisis era by mitigating contagion in interconnected markets through the management of counterparty credit risk—the risk that the opposing party in a financial transaction fails to deliver payments or assets. Traditional risk assessments of CCPs primarily address the impact of member or client defaults on CCP liquidity and solvency. This paper introduces a framework that expands this focus to include investment risks associated with the significant cash CCPs hold as margin and applies it to CCPs operating in – or of systematic importance for – the European Union (EU). Specifically, we analyze ‘non-default’ losses stemming from market risk and counterparty credit risk within CCPs’ cash investment strategies. Our findings show that the impact of market risk is generally contained due to strict eligibility criteria and the short duration of investments. However, counterparty credit risk from reverse repo exposures can be substantial, with frequently insufficient haircuts that do not provide sufficient protection against collateral devaluation, posing the potential to significantly deplete available CCP resources. Quantifying these risks sheds light on how margin calls can transmit financial stress from capital markets into money markets via CCPs’ cash management practices.