Limiting Taxpayer "Puts" - An Example from Central Counterparties

November 12, 2014

Preview Citation

Format: Chicago

Manmohan Singh. Limiting Taxpayer "Puts" - An Example from Central Counterparties, (USA: International Monetary Fund, 2014) accessed September 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Nonbanks such as central counterparties (CCPs) are a useful lens to see how regulators view the role of the lender-of-last-resort (LOLR). This paper explores the avenues available when a nonbank failure is likely, specifically by considering the options of keeping CCPs afloat. It is argued that CCPs have, by regulatory fiat, become “too important to fail,” and thus the imperative should be greater loss-sharing by all participants that better align the distribution of risks and rewards of CCPs, the clearing members and derivative end-users. In the context of LOLR, the proposed variation margin gains haircut (VMGH) is discussed as a way of limiting the taxpayer put.

Subject: Asset and liability management, Banking, Central counterparty clearing house, Financial markets, Liquidity, Market risk

Keywords: Allocation choices arise, Allocation option, CCP credit risk, CCP failure, CCP insolvent, CCP rule, Central bank, Central counterparties, Central counterparty, Central counterparty clearing house, Global, Lender-of-last-resort, Liquidity, Market, Risk management practice, Variation margin, Variation margin gains haircut, WP

Publication Details

Pages:

16
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/203
Stock No:

WPIEA2014203
ISBN:

9781498322423
ISSN:

1018-5941

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