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Mr. Manmohan Singh

), and risk management policies. CCPs are designed to pre-fund liquidation of clearing member positions through initial margin and maintain surplus cover of exposures through periodic variation margin so that the CCP does not take market risk or credit risk except under extreme scenarios. Extreme scenarios are then covered through default fund and equity provision. Thus, CCPs typically do not hold as much “conventional” capital (in the form of equity or equity-like capital instruments) as other financial institutions to provide a loss-absorbing buffer. However due to

Mr. Manmohan Singh
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.
Mr. Manmohan Singh

Front Matter Page Monetary and Capital Markets Department Contents I. Introduction II. CCPs: Past and Future III. Some Loss-Allocation Choices IV. Variation Margin Gains Haircut (VMGH) V. Conclusion References Figures 1. The Bank–Nonbank Nexus 2. A Hypothetical “Waterfall” Situtation 3. LOLR Funds vs. VMGH Box Central Bank Liquidity (when there is no uncapped VMGH) References