Abstract
Through their clearing and settlement activity, central counterparties (CCP) ensure the stability of the financial system. They operate a multilevel guarantee system containing the initial margin requirements, the default fund contributions, and their own contribution, referred to as skin-in-the-game (SITG). Using a Monte-Carlo simulation method-based framework, the study examines how the value of SITG changes in different guarantee system settings, specifically through the implementation of a merged, separated, or partially separated guarantee system for interconnected markets. The primary objective is to quantify the minimum amount of SITG necessary for a CCP to protect non-defaulting members or to prevent the execution of the CCP's recovery and resolution plan. The findings indicate that a partially separated guarantee system is the most beneficial option for most stakeholders.
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