Template-type: ReDIF-Paper 1.0 Author-Name: Philipp Haene Author-Name-First: Philipp Author-Name-Last: Haene Author-Person: pha928 Author-Name: Andy Sturm Author-Name-First: Andy Author-Name-Last: Sturm Title: Optimal Central Counterparty Risk Management Abstract: In order to protect themselves against the potential losses in case of a participant's default and to contain systemic risk, central counterparties (CCPs) need to maintain sufficient financial resources. Typically, these financial resources consist of margin requirements and contributions to a collective default fund. Based on a stylized model of CCP risk management, this article analyzes the main factors affecting the trade-off between margins and default fund. The optimal balance between these two risk management instruments is found to depend on collateral costs, participants' default probability, and the extent to which margin requirements are associated with risk-mitigating incentives. Given the increasing role of CCPs in financial markets in general and for financial stability in particular, these considerations are not only important for CCPs themselves, but also for financial regulators. Length: 28 pages Creation-Date: 2009 Contact-Email: forschung@snb.ch File-URL: https://www.snb.ch/en/publications/research/working-papers/2009/working_paper_2009_07 File-Format: text/html Number: 2009-07 Classification-JEL: G23, G32, G18 Keywords: Central counterparty, margin requirements, default fund, financial stability, incentives Handle: RePEc:snb:snbwpa:2009-07