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A Balancing Act

May 03, 2017

Aligning incentives through financial resources for effective CCP resilience, recovery and resolution

Marnie Rosenberg
Global Head of Clearing House Risk & Strategy, J.P. Morgan

Our new paper sets forth recommendations related to the financial resources—including central counterparties' (CCPs) own-funds capital—that should be available to CCPs during times of market stress stemming from clearing member default(s) or non-default losses.

The volume of transactions cleared by CCPs has increased significantly as a result of derivatives market reforms, including mandatory clearing and non-cleared derivative margin rules. While clearing has reduced risk in the financial system through netting and collateralization, credit and operational risks have become increasingly concentrated in a small number of large, globally interconnected CCPs and create a new central point of potential systemic failure.Over the past few years, regulators have worked together and, with input from CCPs, their members and other market participants, have made substantial progress in developing and strengthening a global framework to address this risk.

We believe that further work is needed to ensure that the risk management, governance and oversight models of CCPs keep pace with their growing systemic importance. It is critical to clearly understand the continuum of resources available for the CCP to manage stress scenarios, and the alignment of incentives so that clearing members and their shareholders do not serve as a backstop for CCPs that are for-profit institutions.

Our proposals address each phase of the resilience, recovery, resolution and recapitalization process in order to strengthen the clearing infrastructure and the networks within the system, promoting confidence and providing transparency for all participants.

Central clearing is essential to managing systemic risk, but the global clearing framework is only as strong as the adequacy and seamless continuum of the financial resources underpinning it. Creating the right balance and aligning incentives between members and CCPs/their shareholders will be critical to supporting resilience, recovery and resolution in times of stress.

To learn more, download the full paper - A Balancing Act: Aligning incentives through financial resources for effective CCP resilience, recovery and resolution



J.P. Morgan’s proposals for a globally consistent framework of financial safeguards and capital requirements



  • Funded financial resources should cover, at a minimum, the default of the two clearing members to which the CCP has the largest exposures. Individual CCP default coverage should be based on the CCP’s unique member risk profile
  • CCP's own-funds first tranche contribution, or “skin in the game,” should be right-sized and scale with the level of risk to ensure alignment of incentives
  • CCP's own-funds capital should be right-sized, at an appropriate level to absorb non-default losses and to ensure that CCP's can invest adequately to, among other things, build up appropriate cyber defenses
  • Regulators should undertake quantitative impact studies to model the optimal level of a CCP’s own-funds capital to cover default and non-default losses


  • Aggregate assessments across members should be predictable and capped, over a reasonable period, at an amount equal to the aggregate default fund at the CCP
  • Residual losses that arise in extreme tail events should be covered by the entirety of CCP own-funds right-sized capital to ensure alignment of incentives


  • Authorities should have the flexibility to commence resolution when there are sufficient resources remaining for loss absorption
  • As a last resort, should no other loss absorbing resources be available, authorities may use VMGH for a single day. This interim measure avoids payment default and allows time for position re-balancing and recapitalization
  • If auctions or on-exchange liquidations by the CCP have failed to return the CCP to a matched book, partial tear-ups should be the only other rebalancing tool used by the resolution authority
  • Authorities must have access to reliable resources to ensure recapitalization and protect against future losses, without either relying on public funds or expecting members to serve as a backstop. One option would be to require CCPs or their holding companies to issue bail-in-able long-term debt to unaffiliated institutional investors to facilitate recapitalization

See a diagram of our recommendations for CCP financial safeguards and capital requirements here.


About the Author:

Marnie Rosenberg is the Global Head of Clearing House Risk & Strategy at J.P. Morgan. The team’s primary responsibilities are to evaluate the firm’s membership risk related to centrally cleared trading activities, liaise with internal and external constituents to determine and guide JPM’s thinking on central counterparty risk concerns and related regulatory matters. Ms. Rosenberg is an industry leader, and subject matter expert on central-counterparty (CCP) best practices, structures and related risk concerns, representing JPM in various external industry/trade forums, demonstrating thought leadership in CCP risk methodologies/frameworks, and recovery and resolution. She has been the JPM spokesperson on leading conference panels and at international regulatory meetings and workshops as well as testified on behalf of JPM at a June, 2016 U.S. House of Representatives Agriculture Subcommittee hearing “To review the impact of G-20 clearing and trade execution requirements”. Ms. Rosenberg currently serves on the CFTC’s Market Risk Advisory Committee, representing JP Morgan. Prior to joining JP Morgan, Ms. Rosenberg worked at both a start-up enterprise-wide risk management software company focused on financial services and the Federal Reserve Bank of New York’s Bank Supervision function as a senior financial examiner. Ms. Rosenberg holds a Masters in public policy from Harvard University and a Bachelor of Arts in history from Northwestern University.