Digital Library of the European Council for Modelling and Simulation

Title:	The Necessary Size Of The Skin-In-The-Game To Stay In The Game
Authors:	Kira Muratov-Szabo, Andrea Prepuk, Melinda Szodorai, Kata Varadi
Published in:	2020). ECMS 2020 Proceedings Edited by: Mike Steglich, Christian Muller, Gaby Neumann, Mathias Walther, European Council for Modeling and Simulation. DOI: http://doi.org/10.7148/2020 ISSN: 2522-2422 (ONLINE) ISSN: 2522-2414 (PRINT) ISSN: 2522-2430 (CD-ROM) ISBN: 978-3-937436-68-5 ISBN: 978-3-937436-69-2(CD) Communications of the ECMS , Volume 34, Issue 1, June 2020, United Kingdom
Citation format:	Kira Muratov-Szabo, Andrea Prepuk, Melinda Szodorai, Kata Varadi (2020). The Necessary Size Of The Skin-In-The-Game To Stay In The Game, ECMS 2020 Proceedings Edited By: Mike Steglich, Christian Mueller, Gaby Neumann, Mathias Walther European Council for Modeling and Simulation. doi: 10.7148/2020-0122
DOI:	https://doi.org/10.7148/2020-0122
Abstract:	The role of central counterparties (CCPs) is to manage counterparty risk during trading on exchanges. In order to assure resilience, CCPs are required to operate a multilevel guarantee system, the default waterfall (DW). Our paper focuses on the third layer of this DW, which is the own capital of the CCP, the skin-in-the-game (SITG). While EMIR (European Market Infrastructure Regulation), the European regulatory background for CCP, expects a 25% contribution to the guarantee system of its own capital, experts challenge the necessity of such a level of own capital inclusion. The size does not serve only as a line of defense against clearing member default, but it also creates incentives for both CCPs and its participants to adjust their risk-taking depending on the level of SITG contributed. In our model, we quantify the SITG and show the difference between covering the losses exclusively with the defaulting member’s own resources and the SITG or also with non-defaulting members’ contributions.
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