Central Counterparty CVA

In this article we quantify the loss a financial institution can expect due to central counterparty (CCP) membership. Such a loss can be incurred whenever the CCP has insufficient funds to unwind the portfolio of a defaulting clearing member. This does not necessarily require the default of the CCP itself which is different to a standard bi-lateral exposure. We show in particular that a clearing member's CCP risk is given by a sum of exposures to each of the other clearing members. This arises because of the implicit default insurance that each member has provided in the form of mutualized, loss sharing collateral. We provide a model to calculate the exposures by specifying the parameterized loss distributions of the individual member portfolios. The resulting expected loss can be interpreted as a CCP counterparty valuation adjustment (CVA). This can also be applied to the calculation of losses in stress scenarios as specified, e.g., by the Comprehensive Capital Analysis and Review (CCAR) regulatory framework. We show that a typical stressed expected loss ranges between 10bp and 40bp of the total posted initial margin