Skin in the game: risk analysis of central counterparties
Year: 2025
Type: article
Abstract: We introduce a quantitative framework to design the capital contribution of a central counterparty (CCP) to its default waterfall, known as ``CCP skin-in-the-game'' (SITG). We show that under inadequate SITG levels, non-defaulting members are more exposed to default losses than CCPs. The resulting risk management incentive distortions could be mitigated by using the proposed framework. Our analysis addresses investor-owned and member-owned CCPs, we also analyze multilayered and monolayer default waterfalls. Viewing the total size of SITG as the lower bound on CCP regulatory capital, the framework can be used to improve capital regulation of investor-owned and member-owned CCPs. Finally, we show that bank capital rules for CCP exposures may underestimate risk.
Authors: Rama Cont, Samim Ghamami
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4410159634