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We propose a general framework for estimating the likelihood of default by central counterparties (CCP) in derivatives markets. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the credit default swaps (CDS) market under shocks that are similar in magnitude to the Federal Reserve's 2015 CCAR trading book shock. The analysis indicates that the main U.S. CCP for this market (ICE Clear Credit) could be more vulnerable than conventional stress testing approaches suggest.

How Safe are Central Counterparties in Derivatives Markets?