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Central clearing and credit default swaps

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dc.contributor.author Cao, Tran Bao
dc.date.accessioned 2017-05-22T00:12:16Z
dc.date.accessioned 2022-07-11T21:25:15Z
dc.date.available 2017-05-22T00:12:16Z
dc.date.available 2022-07-11T21:25:15Z
dc.date.copyright 2016
dc.date.issued 2016
dc.identifier.uri https://ir.wgtn.ac.nz/handle/123456789/20176
dc.description.abstract My interest in this research topic was inspired by the apparently global consensus on the mandate for central clearing in the credit default swaps market. At the first glance, the central clearing mechanism with its central counterparties is the hero who saved many market participants from substantial losses following Lehman Brother’s collapse. It was heralded for debunking the complex interconnection among financial counterparties and resolving Lehman Brother’s positions in a timely and orderly manner. Nonetheless, after coming into the spotlight, central counterparties raise significant concern about their potential to concentrate systemic risk and grown into ‘too important to fail’ institutions. Any collapse of a ‘too important to fail’ institution is undoubtedly disastrous and likely results in a cascade of defaults by other market participants. Therefore, it is highly questionable whether central clearing can ultimately maintain and protect the market robustness and sustainability. It is even criticised as the Maginot Line of the financial market for being a costly but inefficient bulwark and creating a “false sense of security”. Therefore, this research paper aims to address the aforementioned concern, whether the central clearing regime should be promoted to mitigate the counterparty risk even when it simultaneously propagates another type of systemic risk to the financial market. As the legal framework and the risk management practices of CCP have not been battle test, it is impossible to reach any final and ex post conclusion on the ultimate efficiency of CCP. Nevertheless, historically CCP managed to withstand severe market distress whereas currently policymakers and regulators are spending increasing efforts on addressing and mitigating the systemic risk concentrated through CCP. Compared to other alternative clearing infrastructures, it is evident that central clearing is the optimal approach to address the counterparty risk and to enhance the market stability. Further, the research demonstrates that despite central counterparties’ potential to concentrate and re-distribute systemic risk, their shortcomings and contagious fallouts are not insurmountable. They can be efficiently controlled and mitigated through the implementation of adequate regulations and supervision. en_NZ
dc.format pdf en_NZ
dc.language en_NZ
dc.language.iso en_NZ
dc.publisher Te Herenga Waka—Victoria University of Wellington en_NZ
dc.subject Central clearing en_NZ
dc.subject Central counterparties en_NZ
dc.subject Credit default swaps en_NZ
dc.subject Counterparty risk en_NZ
dc.title Central clearing and credit default swaps en_NZ
dc.type Text en_NZ
vuwschema.contributor.unit Victoria Law School en_NZ
vuwschema.contributor.unit Faculty of Law / Te Kauhanganui Tātai Ture en_NZ
vuwschema.subject.anzsrcfor 189999 Law and Legal Studies not elsewhere classified en_NZ
vuwschema.subject.anzsrcseo 970118 Expanding Knowledge in Law and Legal Studies en_NZ
vuwschema.subject.anzsrctoa 1 Pure Basic Research en_NZ
vuwschema.type.vuw Research Paper or Project en_NZ
thesis.degree.discipline Law en_NZ
thesis.degree.name LL.B. (Honours) en_NZ
vuwschema.subject.anzsrcforV2 489999 Other law and legal studies not elsewhere classified en_NZ
vuwschema.contributor.school School of Law en_NZ

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