Central Counterparties Help, But Do Not Assure Financial Stability
This paper looks into the role central counterparties (CCPs) play by stepping into the middle of trades and the benefits they provide to market participants but to the overall promotion of financial stability. Several key observations are presented while also highlighting some commonly held misconceptions and overly-complacent conclusions about CCPs’ ability to stabilize financial markets, especially in the presence of systemic shocks. It finds that strengthening CCPs is a necessary but hardly sufficient condition to ensure financial system stability. In a post-crisis environment that is still reformulating and issuing new regulations, macroprudential regulators should be mindful of policies aimed at improving CCP functioning, inducing unintended consequences.