Abstract
To control counterparty risk, financial regulations such as the Dodd–Frank Act are increasingly requiring standardized derivatives trades to be cleared by central counterparties (CCPs). It is anticipated that in the near term future, CCPs across the world will be linked through interoperability agreements that facilitate risk sharing but also serve as a conduit for transmitting shocks. This paper theoretically studies a networked network with CCPs that are linked through interoperability arrangements. The major finding is that the different configurations of networked network CCPs contribute to the different properties of the cascading failures.
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