CCP Coverage Standards Analysis

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Welcome to Global Custody Pro, read by custody professionals like you. I'm Brennan McDonald, Managing Editor. I write about the global custody industry, having spent over 12 years in financial services, including working at a global custody bank. 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

• Why Coverage Standards Impact Protection

• Most CCPs Report Cover 2

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About This Monday Series

Premium subscribers to Global Custody Pro receive exclusive Monday observations from this developing database project. While Wednesday and Friday bring news about custody and digital assets, Monday focuses on the post-trade infrastructure underlying global markets.

The database currently covers 32 major CCPs with quarterly data through Q2 2025. As I add more institutions and quarterly updates, subscribers get early access to observations and questions emerging from the data.

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This analysis examines coverage standards and financial resources across 32 central counterparties using Q1 2025 CPMI-IOSCO quantitative disclosures.

Why Coverage Standards Impact Protection

The concept of coverage standards emerged from the 2008 financial crisis, when the collapse of Lehman Brothers revealed how quickly problems at one institution could spread through the financial system. Central counterparties, which stand between buyers and sellers in financial markets, require clear rules regarding the amount of money to keep on hand for emergencies.

In the PQD framework, the Cover 1/2 label is stated in relation to total prefunded default resources, that is, resources intended to absorb losses in excess of initial margin under extreme but plausible conditions. Operationally, a CCP's waterfall uses the defaulter's initial margin and default fund contribution first, then the CCP's own capital (skin-in-the-game), and finally mutualised prefunded default resources. Cover 1 means having sufficient prefunded resources to handle losses from your largest member beyond what their initial margin covers. Cover 2 extends this to handle losses from your two biggest members simultaneously.

The cost difference between these standards depends entirely on the structure of each CCP's membership. If one member dominates, representing perhaps 40% of potential losses while the second largest represents only 5%, then Cover 2 requires only marginally more resources than Cover 1. But if the top two members are similar in size, each representing 20% of potential losses, then Cover 2 might require nearly double the resources. This concentration factor never appears in public disclosures, making it impossible to know the real cost difference at any specific CCP.

Most CCPs Report Cover 2

Our database currently includes 32 CCPs with Q1 2025 data (from a larger set of 36 CCPs in various stages of data collection). Of these 32, twenty-five report their coverage standard in the designated field while seven provide no information. When we decode the various ways CCPs express their standards, we find that 19 CCPs (76% of those reporting) maintain Cover 2 or higher, three CCPs (12%) maintain Cover 1, and three CCPs (12%) report both standards.

The surprise in the data is those three CCPs reporting both Cover 1 and Cover 2. One shows different standards at different times in their reports. Another uses percentage-style coverage language without defining what it means. The third reports both standards simultaneously without any distinction. Public disclosures provide no information about which products or services receive which level of coverage, leaving users unable to determine their actual protection.

Some CCP services go beyond the standard Cover 2, with disclosures indicating coverage calibrated to handle more than two member defaults. This shows that the Cover 1/2 framework represents minimum standards rather than ceilings.

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