Skin in the Game: Risk Analysis of Central Counterparties
This paper introduces an incentive compatibility framework to analyze agency problems linked to central counterparty (CCP) risk management. Our framework, which is based on a modern approach to extreme value theory, is used to design CCP skin-in-the-game (SITG). We show that under inadequate SITG levels, members are more exposed to default losses than CCPs. The resulting risk management incentive distortions could be mitigated by using the proposed SITG formulations. Our analysis addresses investor-owned and member-owned
CCPs, we also analyze multilayered and monolayer default waterfalls. Viewing the total size of SITG as the lower bound on CCP regulatory capital, the framework can be used to improve capital regulation of investor-owned and member-owned CCPs. We also demonstrate that bank capital rules for CCP exposures may underestimate risk. The broader central clearing mandate of U.S. Treasuries may take place under monolayer CCPs. These clearinghouses may need to allocate more of their own capital to the default waterfall.
Samim Ghamami is currently an economist at the U.S. Securities and Exchange Commission, the Division of Economic and Risk Analysis (DERA), a senior researcher and an adjunct professor of finance at New York University, a senior researcher at UC Berkeley Center for Risk Management Research and the Department of Economics, and a senior advisor at SOFR Academy.
Ghamami has been a senior economist, a senior strategist, and a senior vice president at Goldman Sachs. He has also been an adjunct associate professor of economics at Columbia University. In 2019, Ghamami moved to the Financial Services Forum through Goldman Sachs, where he was the senior economist and managing director. Ghamami has also been an associate director and a senior economist at the U.S. Department of the Treasury, Office of Financial Research, and an economist at the Board of Governors of the Federal Reserve System.
Ghamami’s work has broadly focused on financial economics, quantitative finance, and on the interplay of finance and macroeconomics. His work on banking, asset management, risk management, economic policy, financial stability, financial regulation, and central clearing has been presented and discussed at central banks. He has been an advisor to the Bank for International Settlements and has worked as an expert with the Financial Stability Board on post-financial crisis reforms in 2016 and 2017. Ghamami also served on the National Science Foundation panel on Financial Mathematics in 2017 and 2018.
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Meeting ID: 975 1206 6656