clearing networks
DESCRIPTION
Presentation at FSC-PSSC Workshop "Systemic risk analysis: interconnectedness within the financial system and market infrastructures", Frankfurt, 17 October 2012 The paper presented here will be published in Journal of Economic Behavior and Organization (http://www.fna.fi/papers/jebo2012gs.pdf)TRANSCRIPT
Clearing Networks
Kimmo SoramäkiFounder and CEOFNA, www.fna.fi
Marco GalbiatiECB/Bank of England
FSC-PSSC WorkshopSystemic risk analysis: interconnectedness within the financial system and market infrastructuresFrankfurt, 17 October 2012
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Motivation
• Central counterparties are playing a major role in the financial reform: G20/Pittsburgh, CPSS/IOSCO, Committee on the Global Financial System, etc.
• The main function of Central Counterparties (CCPs) is to novate contracts between trading parties, becoming the ‘seller to every buyer, and buyer to every seller’
• CCPs eliminate counterparty risk but introduce new risks (risks for CCP and margin needs for members)
• Question: How does the topology of the clearing system affect the exposures of the CCP (and the margin needs of all members)
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Agenda
• Model : Trading and Exposures matrices, Novation and Clearing Algorithm
• Variable(s) : Random trading matrices and Clearing topologies measured by their tiering and concentration
• Results : Distributions of exposures and margin needs with different topologies
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Trading and Exposures
• We consider one contract, traded on a market by N ‘counterparties’
• Trading matrix T presents nominal positions of trader i against j
• Exposures between i and j are given by the absolute value of bilateral position of trades
• Example:
Trading matrix Bilateral Netting Exposures
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Clearing Topology
Star 626 topologically different trees
Tiering [0,20]
Conc
entr
ation
[0,1
]
Tiering = N - Number of GCMs - 1Concentration = Gini co-efficient
20 members + CCP
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Examples of network structures
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Novation and Clearing
• Novation is the replacement of exposures between non-adjacent nodes in the clearing network, with other exposures according to a precise rule
• Clearing consists in applying novation iteratively, until no further novation is possible
• Some trades are internalized• Others are brought to CCP
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Example of Novation
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Results - Methodology
• We vary– Trading matrix (3000 realization)– Clearing topology (all combinations with 20 counterparties)
• Run the clearing algorithm
• Look at exposure distributions. From these distributions we focus on– CCP’s total exposure against all GCMs– CCP’s expected exposure against a single GCM– CCP’s largest exposure against a single GCM
• (The paper also looks at margin needs)
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CCP’s total exposure against all GCMs
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CCP’s expected exposure against a single GCM
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CCP’s largest exposure against a single GCM - Tiering
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CCP’s largest exposure against a single GCM - Concentration
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Summary
• We developed a model of clearing systems as networks that transform exposures via novation
• Effects are complex – best topology depends on the objective
• Topologies with lower tiering are more robust against tail risks of CCP but worse for expected risks
• Topologies with higher concentration are always better for CCP
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Thank you
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Complete results - Exposures
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Complete results - Margins