CCP Risk Profiles Are Unique, Say Chicago Fed Analysts

The Federal Reserve Bank of Chicago ("Chicago Fed") published a staff policy paper highlighting the major business model and risk profile differences between central counterparties ("CCPs") and banks. In the paper, titled " A CCP is a CCP is a CCP," Chicago Fed staffers Robert Cox and Robert Steigerwald explain how collateral and capital play different roles in CCP risk management when compared with banks, calling capital "subordinate, yet complementary" in CCP risk management.

The authors emphasized that CCPs (unlike banks) are not in the "business of risk-taking." "CCPs are managers of risk, not takers of risk," they said. The authors assert that central clearing transforms risk instead of eliminating it, and that the role of the CCP is to (i) manage the related credit, liquidity and operational risks, (ii) provide a mechanism for "market entry and exit that supports liquidity" and (iii) ensure clearing members meet all CCP-mandated obligations.