The risks CCPs bring · RiskAtoms Academy

By the end you will be able to

1Explain how central clearing concentrates risk in a few CCPs and their largest members.
2Explain why margin is procyclical and how margin calls became a liquidity problem in March 2020, the LME nickel episode and the UK LDI episode.
3Work out what a clearing member can lose when other members default: its default fund contribution, assessments and haircut VM gains.
4Describe CCP recovery tools and the resolution regimes behind them.

Why it matters

On 9 March 2020, as markets fell on the spread of Covid-19, central counterparties called about $140 billion of variation margin in a single day. Over the month, the initial margin they required rose by roughly $300 billion. No CCP failed, and there were no widespread worries about counterparty credit risk. But the cash had to come from somewhere, and firms sold whatever they could to find it. Clearing had done its job of containing counterparty risk, and had turned some of it into liquidity risk.

Core explanation

What clearing adds as well as removes

Illustrative dataRiskAtoms Bank plc's derivatives book

The module's OTC book: eight trades (swaps, FX forwards, a bought index put) with four invented counterparties, each one netting set: Halvergate Manufacturing (BBB, no CSA), Corriemoor Bank (A), Saltney Capital (a hedge fund) and Ebbsworth Pension Trustees (AA). Exposures come from 2,000 seeded Monte Carlo paths of a flat GBP rate, GBPUSD and an equity index, half a month apart, out to ten years. Every firm and figure is made up for teaching, in pounds, on one valuation day; none is market data.

Wexcombe Clearing House is the illustrative CCP from L3.4.08: Central counterparties: five clearing members, sterling swaps, initial margin of a 99.5% five-day move (£83.9m in all), a default fund of £70m sized to cover the two largest member defaults (Cover 2), and £5m of the CCP's own capital. RiskAtoms Bank is a member; its cleared position is its two swaps with Corriemoor.

L3.4.08: Central counterparties showed what a CCP removes: the web of bilateral exposures, replaced by one net position against a hub that holds margin and a default fund. The risk does not disappear. It changes shape, in four ways.

1. Concentration

Clearing puts many eggs in few baskets. A 2017 study by the Basel Committee, CPMI, FSB and IOSCO of 26 CCPs in 15 jurisdictions found that the resources provided to CCPs were concentrated at a small number of CCPs, that exposures to CCPs were concentrated among a small number of institutions, and that the network had a core of highly connected CCPs and banks. The same large banks are members of most major CCPs, so one bank's failure hits several CCPs at once, and a CCP's failure would hit most large banks. A major CCP cannot be allowed to fail in a disorderly way: hence the recovery and resolution rules at the end of this lesson.

2. Procyclical margin

Initial margin covers a large move over the close-out period, so it is proportional to volatility. When markets become volatile, CCPs recalibrate and call more IM from every member, on both sides of the market: margin is procyclical. At Wexcombe Clearing House, doubling the rate volatility in the model to 180bp a year doubles IM: £83.9m of new cash. Add a 50bp rise in rates and the losing members also pay £51.5m of variation margin. Regulators answer with anti-procyclicality tools: under the EU rules, a CCP must hold a buffer of at least 25% that it can release, or give stressed periods at least 25% weight, or keep margin no lower than a ten-year look-back implies. With a 25% buffer, the same week calls £62.9m instead of £83.9m, at the price of more margin in calm times.

TimelineMargin calls as a liquidity shock

1 / 5

Mar 2020

The dash for cash

Across March 2020, IM required by CCPs rose by roughly $300 billion; CCP variation margin calls peaked at $140 billion on 9 March (BCBS, CPMI and IOSCO review, September 2022). Markets proved broadly resilient, but the calls added to the scramble for cash that also hit government bond markets.

The LDI episode was mostly bilateral (swaps and repo), not cleared, but the lesson is the same wherever margin is called: collateral protects against counterparty default by demanding liquidity. In the book, Ebbsworth Pension Trustees receives fixed on a £300m ten-year swap with RiskAtoms Bank (PV01 £243k). Its CSA has a £10m threshold:

Rise in yields	Ebbsworth's loss on the swap	Collateral it must post
35bp	£8.4m	£0.0m
100bp	£23.2m	£13.2m
160bp	£36.0m	£26.0m
250bp	£53.9m	£43.9m

To meet the 250bp standard on this one swap, Ebbsworth needs £43.9m of cash or eligible gilts it can post without selling into a falling market.

3. Your fellow members' losses

A clearing member is exposed to the CCP in layers. Its own IM is returned in full as long as the CCP survives. Its default fund contribution is mutualised: it pays for other members' defaults. Beyond that, CCP rules usually allow assessments, cash calls on surviving members up to a cap (one times their contribution at Wexcombe Clearing House). These are unfunded and contingent: they arrive exactly when the market is in turmoil. In September 2018 a single trader's default at Nasdaq Clearing's commodities market left a loss of €114 million beyond his collateral; after €7 million of Nasdaq's capital, it fell on the default fund paid in by the other members.

ExploreWho pays when Ravensholt and Corriemoor fail

Wexcombe Clearing House's default fund is sized for these two members' default on a 100bp move. Make the move bigger.

Rate move when they default150bp

Defaulters' initial margin£33.8m
Defaulters' default fund contributions£32.8m
CCP's own capital (skin in the game)£5.0m
Surviving members' default fund£37.2m
Assessments on surviving members£37.2m
Left over: recovery tools£8.6m
Loss on the defaulters' positions£154.5m

Stage reachedrecovery tools

Haircut on survivors' VM gains4.46%

RiskAtoms Bank: default fund lost£4.34m

RiskAtoms Bank: assessment paid£4.34m

RiskAtoms Bank: VM gain of £20.4m cut by£0.91m

RiskAtoms Bank: total cost£9.58m

RiskAtoms Bank did nothing wrong: its own position gains 20.4m on this move. Its cost is the price of sharing losses with the other members. Haircutting stops at 100%; beyond that, the CCP would need resolution.

4. The CCP itself

When the waterfall is spent, the CCP enters recovery under its own rules: further cash calls, variation margin gains haircutting, and as a last resort tear-up of contracts. If that fails, or would itself threaten financial stability, the authorities step in with resolution.

ExploreFrom default to resolution

Click a box to see what happens there.

Prefunded waterfall

The defaulter's IM and default fund contribution, the CCP's skin in the game, then the survivors' default fund. At Wexcombe Clearing House these cover the Cover 2 pair on a 100bp move with £5.8m of the survivors' fund to spare.

The formal version

Two pieces of arithmetic drive the lesson. Initial margin at Wexcombe Clearing House covers a 99.5% one-tailed rate move over a five-day close-out, from a normal volatility $\sigma$ (in bp a year, 250 days):

\begin{aligned} \text{IM} &= |\text{PV01}| \times z_{0.995}\,\sigma\sqrt{5/250} \\ \Delta\text{IM} &= \text{IM}\times\Big(\frac{\sigma_{\text{stress}}}{\sigma} - 1\Big) \qquad \text{(no buffer)} \\ \Delta\text{IM}_{\text{buffer}} &= \text{IM}\times\max\Big(\frac{\sigma_{\text{stress}}}{\sigma} - (1 + b),\; 0\Big), \qquad b = 0.25 \\ \text{RiskAtoms Bank:}\quad \text{IM} &= \text{£}4.46\text{m}, \quad \Delta\text{IM} = \text{£}4.46\text{m}\ \text{(no buffer)},\ \text{£}3.34\text{m}\ \text{(25\% buffer)} \end{aligned}

When the prefunded resources are used up, a remaining loss $L$ can be shared by haircutting the variation margin gains $G_j > 0$ owed to surviving members' accounts on the day, pro rata:

\begin{aligned} h &= \min\Big(\frac{L}{\sum_j G_j},\; 1\Big), \qquad \text{member } j \text{ receives } (1-h)\,G_j \\ \text{Member } j\text{'s total cost} &= \text{DF}_j^{\text{used}} + \text{assessment}_j + h\,G_j \end{aligned}

Try it

Put Wexcombe Clearing House's members through a stressed week. Move rates, raise the volatility the CCP uses for IM, and switch the anti-procyclicality buffer on and off.

Try itA stressed week at Wexcombe Clearing House

Rate move over the week+50bp

Volatility in the IM model×2.00 · 180bp

Anti-procyclicality buffer

Member	VM (+ receives)	Extra IM	Cash out
RiskAtoms	+£6.8m	£4.5m	£4.5m
Corriemoor	−£21.0m	£13.8m	£34.8m
Ravensholt	−£30.5m	£20.0m	£50.5m
Kestermoor	+£39.0m	£25.6m	£25.6m
Pellbridge	+£5.7m	£20.1m	£20.1m

Cash members must find this week£135.4m

of which extra initial margin£83.9m

IM held before the week£83.9m

VM paid in = VM paid out£51.5m

Variation margin only moves cash from losers to winners. Extra initial margin is new cash, taken from every member at once, and it rises with volatility whichever way rates go. Set the move to zero and push volatility up: the calls do not go away. With the 25% buffer, members post more in calm times and less in the storm.

Worked example

RiskAtoms Bank's bill when Ravensholt and Corriemoor fail

A 150bp rise in rates, beyond the CCP's 100bp stress scenario

Step 1 of 5

1
The defaulters' losses
Ravensholt and Corriemoor are net receivers of fixed: they lose when rates rise. On a 150bp rise their house positions lose £91.50m (Ravensholt) and £63.00m (Corriemoor): £154.50m in all. Their clients, if any, would be ported to another member.

What the treasury notes

Wexcombe Clearing House: contingent outflows in a double default beyond the stress scenario of up to £8.67m (contribution plus capped assessment), plus VM haircuts. In a volatile week, extra IM of £4.46m (£3.34m with the buffer). Both go into the liquidity stress test (M3.5: Liquidity risk and funding).

Regulatory lens

CCPs are supervised under the CPMI-IOSCO Principles for Financial Market Infrastructures and, in the EU and UK, under EMIR, whose technical standards set IM at a confidence level of at least 99.5% over at least five days for OTC derivatives and require the anti-procyclicality tools above. CPMI and IOSCO's guidance on the recovery of financial market infrastructures (2014, revised on 5 July 2017) sets out what recovery plans and tools must cover; on the same day the FSB published guidance on CCP resolution and resolution planning, building on its Key Attributes. The EU's Regulation (EU) 2021/23 on CCP recovery and resolution entered into force on 11 February 2021, with most provisions applying from 12 August 2022. In the UK, Schedule 11 of the Financial Services and Markets Act 2023 replaced the earlier Banking Act 2009 provisions with an expanded CCP resolution regime, with the Bank of England as resolution authority, in force from 31 December 2023. Banks' capital for exposures to CCPs, including default fund contributions, is in M4.4: Counterparty, operational and large exposures; liquidity stress testing in M3.5: Liquidity risk and funding.

Spark Atoms

Spark AtomOne trader, one market

Nasdaq Clearing's 2018 loss came from one Norwegian trader who had bet that Nordic and German electricity prices would converge. When they moved apart instead, he could not meet a margin call, and the shortfall beyond his collateral fell on a default fund the other members had paid into: a default fund mutualises the risk of the riskiest member, not the average one.

Spark AtomThe trades that never happened

Cancelling a day's trades is almost unheard of on a major exchange. The LME argued it acted to avoid margin calls so large that members could not pay them. The Office of Financial Research estimated that cancellation erased about $1.3 billion of profit and loss between counterparties, and noted that the default waterfall, the CCP's carefully planned loss-sharing, was never used.

Key takeaways

Clearing concentrates risk: resources sit in a few CCPs, exposures in a few large members, with a highly connected core.
Initial margin rises with volatility, so it calls new cash from everyone in a stress; anti-procyclicality tools soften it.
Margin turns counterparty risk into liquidity risk: March 2020, LME nickel in 2022 and the UK LDI episode in September 2022.
Members bear each other's defaults through the default fund and assessments: £9.58m for RiskAtoms Bank in the worked example.
Beyond the waterfall come recovery tools (cash calls, VM gains haircutting, tear-up), then resolution by the authorities.

Reaction

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Glossary

Procyclical: Procyclical: amplifying the cycle. Margin is procyclical when it rises in a stress, draining cash just when it is scarce, and falls in calm markets.
Anti-procyclicality tools: Anti-procyclicality (APC) tools: rules that stop initial margin from falling too low in calm markets or jumping too far in stress, such as a buffer, extra weight on stressed periods, or a long look-back.
Concentration (clearing): Concentration (in clearing): most cleared risk sits in a few large CCPs, and the same few large banks are members of most of them.
Assessment: Assessment (cash call): the CCP's right, written in its rules, to call surviving members for more money once the default fund is used up, usually capped as a multiple of each member's contribution.
Skin in the game: Skin in the game: the CCP's own capital, used in the waterfall after the defaulter's resources and before the surviving members' default fund.
VM gains haircutting: Variation margin gains haircutting: in recovery, the CCP pays members who are owed variation margin only part of it, sharing the loss among those who gained that day.
Tear-up: Tear-up: the CCP terminates contracts to restore a matched book. Partial tear-up ends only the defaulter's unsold positions (and the matching ones); full tear-up ends the whole service.
Recovery: Recovery: the CCP's own plan, under its rules, to cover losses or liquidity shortfalls beyond its prefunded resources and carry on.
Resolution: Resolution: the authorities take control of a failing CCP to keep its critical functions going, using statutory powers, when recovery has failed or would not be enough.
Liability-driven investment: Liability-driven investment: a pension scheme strategy that matches the interest rate and inflation sensitivity of its liabilities, often with leverage through swaps and gilt repo.

Deep Dives & Origins

Deep Dives

BCBS, CPMI and IOSCO, Review of margining practices, Bank for International Settlements, September 2022. Intermediate.
J. Heilbron, Lessons from trade cancellation at the LME in March 2022, OFR Brief 25-01, Office of Financial Research, May 2025. Intermediate.
L. Henning, S. Jurkatis, M. Powar and G. Valentini, “Lifting the lid on a liquidity crisis”, Bank Underground, Bank of England, 18 July 2023. Introductory.

Origins

BCBS, CPMI and IOSCO, “BCBS-CPMI-IOSCO finalise analysis of margining practices during the March 2020 market turmoil”, press release, 29 September 2022.
BCBS, CPMI, FSB and IOSCO, Analysis of central clearing interdependencies, July 2017.
Financial Conduct Authority, “First FCA enforcement action and fine against a Recognised Investment Exchange”, press release, 20 March 2025.
Bank of England, “Bank of England announces gilt market operation”, 28 September 2022; and “Bank of England completes unwind of recent financial stability gilt purchases”, 12 January 2023.
S&P Global Commodity Insights, “LME suspends nickel trading after unprecedented surge to above $100,000/mt”, 8 March 2022.
Bank of England, “LDI minimum resilience: recommendation and explainer”, staff paper, 29 March 2023.
Bank for International Settlements, “Two defaults at CCPs, 10 years apart”, BIS Quarterly Review, December 2018.
M. Gibson, Reserve Bank of Australia, “Recovery and resolution of central counterparties”, Bulletin, December 2013.
CPMI and IOSCO, Recovery of financial market infrastructures, revised report, July 2017; FSB, Guidance on central counterparty resolution and resolution planning, July 2017.
Regulation (EU) 2021/23 on a framework for the recovery and resolution of central counterparties; Financial Services and Markets Act 2023, Schedule 11; Commission Delegated Regulation (EU) No 153/2013, Articles 24, 26 and 28.

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