$1.3 Trillion CCP Risk: Analysis of a new OFR Paper

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Welcome to Global Custody Pro. I'm Brennan McDonald, Managing Editor. I write about the global custody industry, drawing on 12 years of experience in financial services, including in global custody. An AI voice reads the audio version of this newsletter. Have feedback? Just reply to this email or connect with us on LinkedIn.

Table of Contents

• 📰 Welcome to the Newsletter

• A Groundbreaking Analysis From OFR

• Key Data Points of the Paper

• The Methodology of the Paper

• The Three Stress Test Scenarios

• What The Data Reveals

• Resource Utilisation from 2017 to 2024

• No Such Thing As an Average

• The Operational Implications

• Living Through A Waterfall

• Gaps In The Analysis

• Three Scenarios For Custodians

• Regional Variations Made Clear

• Next Steps For The Industry

• The Strategic Implications

A Groundbreaking Analysis From OFR

In today's special long-form edition, I examine a new working paper from the Office of Financial Research on central counterparty risk using new data. I analyse the research through a custody lens, exploring how the paper's three stress scenarios could impact custodians and their clients, and consider the strategic implications for the global custody industry.

The Office of Financial Research is a low-profile part of the US Federal Government. When it publishes working papers, however, it’s worth paying attention. OFR researchers John Heilbron and Stathis Tompaidis published a working paper called “The Impact of CCP Liquidity and Capital Demands on Clearing Members Under Stress” on July 1 2025.

It is the first comprehensive stress test of central counterparty (CCP) and clearing member (CM) interconnectivity. This has implications for global custodians as they consider their dual role as clearing participants and safekeepers of client assets.

This research provides a detailed understanding of the consequences of the post-Global Financial Crisis central clearing mandate. The analysis combined public quantitative disclosures of Financial Markets Infrastructure principles with private supervisory stress test results.

The CPMI-IOSCO disclosures were combined with Federal Reserve Y-14Q supervisory data. It involved 11 major CCPs: CME, FICC, ICC, ICUS, NSCC, OCC, ICE, ICE EU, LCH Ltd, Eurex, LCH SA and JSCC.

Six US G-SIBs were examined: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. This group of CCPs and CMs represents 78% of global pre-funded CCP resources, approximately $1.3 trillion in collateral that underpins the global derivatives and securities markets.

A significant observation in this paper is that while large clearing members have sufficient resources, the size of these demands is enormous. It challenges the assumption that G-SIBs can easily absorb CCP stress and the varying impact of different events, such as this, on various CCPs and CMs, depending on their level of linkage to central clearing.

The core finding in the paper is that in stressed scenarios, demands from CCPs could rise to as much as 25.7% of a clearing member’s liquid resources and 11.7% of its capital resources in the most extreme scenario.

Key Data Points of the Paper

• 25.7%: Maximum potential liquid resource utilisation by CCPs under extreme stress scenarios

• 11.7%: Maximum potential capital resource utilisation under the same scenarios

• 67%: Increase in liquid resource utilisation from 2017 to 2024

• $1.3 trillion: Approximate total pre-funded resources across the 11 CCPs studied

• 6-10x: Multiple by which variation margin calls spiked during Q1 2020 COVID stress

• 78%: Share of global CCP pre-funded resources represented by the 11 CCPs in the study

The Methodology of the Paper

This paper combined public sources and confidential data, as mentioned above. The CPMI-IOSCO quarterly disclosures, also known as PFMI quantitative disclosures, are made quarterly by 46 CCPs globally, including all 11 CCPs in this group.

This data includes aggregate initial and variation margins, default fund sizes, and skin-in-the-game amounts where clearinghouse resources themselves are at risk. The exceedance volumes and assessment powers are disclosed along with important information for stress test development, such as maximum daily variation margin calls made during the reported quarter.

There is also disclosure of Cover-1 and Cover-2 scenarios where the risk of the largest or two most prominent clearing members and their associates defaulting is calculated and disclosed to the public.

The confidential data was from the “FR Y-14Q Schedule L supervisory reports”, which include house account initial margin positions broken down by clearing member and CCP. This also includes each G-SIB’s default fund contributions and annual stress test gains and losses under Dodd-Frank Act stress testing. This granular data is not available in the public domain.

The stress tests integrated the Dodd-Frank stress testing and the LCR 30-day liquidity assumptions. This meant that both market stress and institutional stress were taken into account. This created a comprehensive “double stress” framework.

This matters because combining actual CCP demands on members with bank stress test scenarios was a novel approach. Previous studies had used theoretical or partial data. This combination captures the interlinkage of the global clearing system and generates actual numbers to illustrate how different stress scenarios could work their way through the global financial system.

The Three Stress Test Scenarios

The three stress tests were idiosyncratic shocks, systematic shocks, and a reverse stress test.

The idiosyncratic shocks were based on historical variation margin volatility at each CCP. They took the average daily max variation margin plus a multiple of several standard deviations. This calculation was performed separately for each CCP, using their historical data. This enabled CCP-specific risk assessment.

The systematic shocks captured how CCPs move together during market stress. Using principal component analysis, the researchers found that 70% of CCP stress moves in tandem, often correlating with the VIX volatility index. All CCPs were impacted simultaneously; however, due to their varying business models, product lines, and relative sizes, they responded in unique ways. These shocks were also based on historical correlation data.

The reverse stress test was the most intriguing of all because it reveals the breaking point for CCPs and their potential impact on custodians. The reverse stress test scenario was designed to exhaust the assessment powers of a CCP. It did this by calculating variation margin calls at a level that consumed all existing CCP resources, testing the reliability of assessment powers as a source of capital during stress events.

This third scenario found that the liquid resources of clearing members, ranging from 15% to 35%, would be depleted in such a scenario, raising questions about the adequacy or realism of some of these assessment powers, especially if the same stress event impacted multiple CCPs.

All three stress test scenarios were built on several assumptions and limitations. There was a conservative assumption for loss estimation; losses may have been overstated, and it was assumed bilateral counterparty risk scenarios would “spill over” into these scenarios.

The single-day shock timeline could underestimate multi-day stress because, although CCPs faced an immediate shock, clearing members may already be stressed, and crises may unfold over days or weeks, leaving open questions about systemic resilience. The paper acknowledges these limitations.

Because the population of the analysis consists of 11 CCPs and 6 US G-SIBs, the wider global financial sector isn’t included. Although the 6 US banks in the study account for between 30% to 60% of default fund contributions, the broader complexity of an ecosystem where European and Asian banks are major players and the underlying clients are not incorporated means that my take is the paper is almost looking through the “most likely to survive” lens. The impact on smaller clearing members and indirect clearing participants will need further research.

What The Data Reveals

The most striking finding is hardly surprising - CCPs are highly concentrated. This was always the logical endpoint of central clearing mandates, but the numbers are enormous. The US CCPs alone have over $709 billion in funded resources, with $505 billion of that represented by CME Group in its own right.

The member-owned (FICC, NSCC) vs for-profit CCPs also have different risk profiles. There is a high level of product concentration in futures, options, and interest-rate derivative products, which is understandable given the nature of these products compared to cash equities and fixed income.

The European and Japanese CCPs are found to have much higher assessment powers compared to the US CCPs, with JSCC an outlier at up to 232.6% of the default fund contribution. These reflect different regulatory regimes, but it is an essential consideration for decision-makers. In a crisis scenario, your bank might find itself on the hook for much more than the default fund contribution.

The US G-SIBs are critical clearing members in terms of size for the CCPs in which they participate. Although the concentration levels vary by CCP, the systemic importance goes beyond size. There is also mutual exposure with shared default funds and the unknown potential decisions a regulator or politician will make if an extreme scenario ever eventuates.

In the market stress of early 2020, the maximum aggregate variation margin call averaged 6x to 10x above “normal". Some CCPs experienced much larger spikes than others, demonstrating system resilience but also revealing pressure points. The COVID experience proved that moderate shocks are manageable but concerning.

This is because the peak use of average clearing members’ liquid resources was as high as 32.2%. This indicates that the system has faced near-critical stress before and survived, demonstrating that it isn’t a theoretical maximum but rather an actual lived experience that is increasing over time.

Resource Utilisation from 2017 to 2024

In 2017, clearing member commitments accounted for approximately 15% of the liquid resource capacity. This marks the starting point of analysis, illustrating the pre-volatility spike environment that preceded 2020. There were also lower initial margin requirements at major CCPs in general.

By 2024, this had grown to around 25% of the liquid resource capacity—a 67% increase in just seven years. A single event doesn’t explain this, but a structural shift in demands on capital and liquidity resources. If this trend continues, the interplay with other aspects of financial stability regulation, such as bank capital, will require further research.

Despite stable LCR requirements, banks haven’t reduced liquidity buffers. The increase in usage comes from demand-side support, both house and client activity in cleared markets. The paper suggests that this isn’t due to COVID either - it’s a structural increase in initial margin volatility and market complexity driving higher demands on clearing members as CCPs attempt to manage their risks and prudential obligations appropriately.

No Such Thing As an Average

Discussing average utilisation can mask individual bank stress. Some banks consistently outperform others, whereas others have a much greater buffer capacity to respond to stress scenarios. The competitive implications of this are significant, as risk is not evenly distributed across all parties.

Heilbron and Tompaidis found that even a scenario one standard deviation above the mean could push utilisation to about 50%. This means that in a reasonably expected stress event, half of the liquidity would be consumed, and an individual bank in that situation would be in crisis. This creates systemic weak points across the financial system.

Some clearing members face dramatically higher risks than others due to differences in their business models, client mix implications, and regional exposure differences, and we cannot assume that the average represents the system.

The Operational Implications

The speed of impact presents a significant operational challenge. When shocks to CCPs occur over a single day, no gradual build-up or pre-warning is assumed. You face immediate margin calls in size and immense demand on operational and treasury teams to meet enormous intraday liquidity demands and cutoffs. There is little time to liquidate assets to meet the demands.

If the shock occurs a week or two into a wider market stress scenario, this is the “double stress” nightmare. Liquidity buffers are already lower, and this has reduced your operational flexibility. Multiple operational, funding, liquidity and capital stress channels are hitting at the same time.

A critical timing gap needs to be bridged, as LCR assumes a 30-day runway. The Silicon Valley Bank and UBS events suggest that a few days can change everything when clients wire funds in real-time. The CCP demands are immediate, and operational procedures and limits have to accommodate this. All of these processes have to be carefully designed, implemented, and tested to be crisis-ready.

Living Through A Waterfall

A default waterfall is the method by which a loss event is allocated. Initial margin is the priority, followed by a default fund if available, then skin-in-the-game, and finally, assessments. Each CCP has its variations on this set out in its disclosure documents, regulatory filings, operational procedures and rulebooks.

Each layer of the waterfall has its operational requirements and consequences across a clearing member’s operations. Initial margin or variation margin top-ups are an immediate liquidity need as soon as they are received. Default fund losses are a capital write-down. Assessments for additional contributions to a faltering CCP in such an event consume top management's bandwidth, liquidity, and capital.

The operational focus must be on the clinical management of the margin and its associated processes. The paper suggests that demands in a stress scenario are primarily due to the initial margin requirements shifting upwards, which causes additional stress through the stress multipliers in the model being run by the CCP. Default scenarios will be rarer but more severe.

Only the most extreme losses will trigger losses from the default fund. However, if that scenario were to arise, the impacts would be severe. Multiple demands will arrive simultaneously, and operational capacity and capability will be tested to their maximum. Client communication will be critical.

Gaps In The Analysis

Heilbron and Tompaidis are cautious to state the limitations of their analysis. The impact on clients of clearing members is a significant gap. For custodians, we should consider the flow-on impacts on client margin calls and operational capacity for handling multiple simultaneous additional calls, as well as any client default events that may occur during a severe stress scenario.

The impact on smaller clearing members (which is an enormous part of the industry!) is also not discussed. These “smaller” firms still represent a large amount of CCP exposure and underlying client activity. Smaller members could even fail to meet some CCP calls, which could then trigger further assessments for the remaining members to meet. Systemic risk is possibly underestimated overall, especially if these smaller CMs are clients of larger CMs.

Multi-day stress is also underestimated. Real crises are rarely resolved in a day. Cumulative impacts aren’t evaluated. Operational fatigue among teams isn’t explored, and the challenges of replenishing liquidity and capital resources aren’t addressed.

The custody-specific implications can include more concentrated exposures, such as large custodians that are systemic actors in ecosystems such as tri-party repo. Some clients already lack or optimise their liquidity and could have insufficient buffers for these extreme stress scenarios.

Client margin calls will cascade through the custody chain and could lead to payment and operational bottlenecks. The capacity of operational teams, customer-facing teams, and the bandwidth of top management can be completely consumed during a crisis, and there is a risk that decision-making processes become bogged down at the least convenient times.

Three Scenarios For Custodians

The idiosyncratic scenario might look like this: a single CCP failure. This would include initial margin, default fund and assessment contributions. It would be manageable in a high-level sense but an immense burden and pressure scenario for operational teams. It would serve as a warning sign for concentration risk at large CCPs, even with enormous resources and regulations.

The custodian implications in this scenario would include immense stress on specific teams, depending on the client mix and products involved at that CCP. The reputational risk or client impacts from mishandling a scenario like this could be franchise-damaging. It would serve as an operational precedent for any larger events and stress test other processes and controls.

The systematic scenario would be a much graver challenge. Suppose all CCPs are impacted at the same time. In that case, correlation risk is real, system-wide operational stress is putting pressure on other areas and exposing gaps - there aren’t any safe havens in this scenario.

The custodian implications in this scenario are an order of magnitude more challenging. All operational and management teams are engaged, top management bandwidth is stressed, prioritisation decisions are required, and client communications could become disjointed and overwhelmed because this is likely happening at the same time as a financial crisis or geopolitical disaster.

The reverse stress test scenario is the most interesting. What happens when the system is pushed to its maximum? This is where write-offs and losses begin to impact bank CET1 capital ratios, and a multiplier effect of losses on losses occurs. There are significant capital and risk implications associated with this.

The question of buffer adequacy and how much liquid or high-quality assets becomes a matter of existential importance. There are also strategic positioning and competitive impacts, as some clearing members will be more severely harmed by these events than others due to differences in their relative exposure and dependency on CCPs.

When this occurs during a market stress event and liquidity buffers are already under stress, the need for a “worst case” sizing requirement is clear, as multiple default fund write-offs and subsequent assessments or recapitalisation requests could prove crippling to the global clearing ecosystem.

Regional Variations Made Clear

The regional variations revealed in the research underscore how, despite global alignment on PFMI principles and disclosure regimes, every country has its unique characteristics. The US member-owned CCPs have a different risk profile that mutualises resources and could be argued to be more “efficient”.

The European CCPs have higher assessment multiples vs the default fund contribution and more aggressive loss mutualisation, but this is because their regulatory philosophy is quite different. The Japanese CCP is much different again, pushed by concentration risks and market structure differences.

In a crisis scenario, it would be helpful to consider what politicians, regulators, and central bankers would do or not do, in addition to the CCPs themselves. There are very real “unknown unknown” risks in how these scenarios could play out.

Next Steps For The Industry

The author’s core messages were that continued monitoring of these risks is valuable, the analysis should be expanded to other clearing members, and that the 67% increase in resource utilisation over the 7 years from 2017 to 2024 warrants immediate investigation. This is because if CMs utilise more resources at CCPs in “business as usual”, there is less buffer room available to them during times of stress.

Custodians will need to think through how the three scenarios would apply to their institutions. They can use the three scenarios as a base, apply them to current positions, include client exposures and likely responses, and test their operational capacity to handle each scenario.

They will already have extensive risk management processes in place to address these risks, given the severe consequences that would result from a disaster striking. Still, research like this is always better extended to your unique fact base so you can think through whether any adjustments are needed in clearing strategy, client mix, margin management, or operational processes for “extreme” scenarios.

The Strategic Implications

The demands CCPs make of clearing members are volatile. They require constant monitoring and management. There are strategic considerations surrounding the entire interactions a CM has with a CCP and the overall central clearing strategy, especially when considering that most CMs also have significant bilateral exposure in these same scenarios.

Not all firms are equally exposed to these risks, and client selectivity means that some will face much fewer challenges in terms of client-level margins and default risk. This research challenges current pricing models. If extreme scenarios require 25% liquidity buffers, the economics of clearing, especially for smaller clients, may need a reassessment. Some clearing participants will not be charging enough to cover the systemic risk they are absorbing for their underlying clients.

Overall, the importance of the custody platform interacting at a high level of automation with all central counterparties faced globally is key. In a crisis, any residual manual processes yet to be automated will face severe pressure. There are also numerous process and compliance issues to work through at pace in such a scenario.

This paper should serve as a wake-up call to more than just those who face CCPs in their daily business activities. It is a broader financial stability issue, and increasing preparedness for extreme events now is much easier and lower cost than experiencing material losses in a crisis.

I look forward to further research on this topic from the OFR, particularly if they expand the 6 G-SIB analysis to include more US G-SIBs from a custody perspective. Expanding it further to include more European and Asian banks would add even more value to our ability to understand both the public and private data that already exists on these important systemic risk topics.

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