Skin in the game: central counterparty risk controls and incentives

The increasing systemic importance of central counterparties (CCPs) has seen recent policy debates focus on the ability of CCPs to withstand a crisis effectively. CCPs maintain prefunded financial resources to cover the potential losses arising from the default of a clearing participant. This paper discusses the incentives created by the composition of these resources, and draws out the role of transparency and governance in ensuring these incentives are effective.