Partner John Williams and senior associate Ben Kastner, both of Milbank LLP’s Alternative Investments and New York-based Derivatives practice, along with Christopher Cononico of Millennium, co-authored a paper published in the March 2025 edition of the Journal of Financial Market Infrastructures titled “Till Def(Ault) Do Us Part: Reassessing Counterparty Risk Between Global Systemically Important Banks and Central Counterparties.”
The article discusses how legal changes to strengthen the risk profiles of global systemically important banks (G-SIBs), such as the “orderly unwind” regulatory mandates, have bolstered the risk profiles of central counterparties (CCPs) and their ability to provide payment, clearing and settlement services in catastrophic scenarios, such as the bankruptcy and resolution of a G-SIB. The authors investigate how far liquidity at G-SIBs may be available to CCPs prior to a G-SIB resolution beginning and before a forced closeout is necessary, allowing the G-SIB to continue trading with a CCP until a payment default occurs.
Traditionally, the “default risk” of a clearing member (CM) to a CCP was measured with solvency risk analysis, whereby only collateral already held by a CCP could be expected to be relied on once a CM failed. CCPs may be significantly more protected than widely recognized, according to the authors. Since 2009, lawmakers throughout the world began enacting laws and regulations designed to mitigate future financial crises, and G-SIBs are now required to maintain substantial amounts of prepositioned liquidity that will be available to fund G-SIB liquidity needs at CCPs and other key financial market infrastructures after resolution commences, which notably extend well beyond the overnight or multiday closeout periods that would be imposed by CCPs. Rather, they are calibrated to meet stressed collateral calls and payments to designated CCPs after the G-SIB enters resolution. This immediate availability of on-balance-sheet resources after resolution commences is a significant change relative to previous frameworks.
Mr. Williams regularly advises clients on CCPs and related derivatives market infrastructure issues, such as swap execution facilities and cleared repo facilities. He designed and continues to manage the content for the FIA CCP Risk Review. Mr. Kastner’s practice includes representing financial institutions in a wide variety of structured credit and derivative transactions, including complex securitizations, asset-backed commercial paper facilities and credit default swaps.
Read the full article in the Journal of Financial Market Infrastructures.
