John Williams and Ben Kastner of Milbank LLP, along with Christopher Cononico from Millennium, have co-authored a paper in the Journal of Financial Market Infrastructures. The article, titled “Till Def(Ault) Do Us Part: Reassessing Counterparty Risk Between Global Systemically Important Banks and Central Counterparties,” was published in March 2025.
The paper examines legal changes aimed at enhancing the risk profiles of global systemically important banks (G-SIBs). These changes, including “orderly unwind” regulatory mandates, have also strengthened central counterparties (CCPs) in providing payment, clearing, and settlement services during critical scenarios like the bankruptcy of a G-SIB. The authors explore how liquidity at G-SIBs might be accessible to CCPs before a resolution starts and prior to any forced closeout, allowing continued trading until a payment default occurs.
Traditionally, the “default risk” of a clearing member (CM) to a CCP was assessed using solvency risk analysis. This meant relying solely on collateral already held by a CCP once a CM failed. However, according to the authors, CCPs may be more protected than previously thought. Since 2009, laws and regulations worldwide have been enacted to prevent future financial crises. G-SIBs are now required to maintain significant prepositioned liquidity available for funding needs at CCPs after resolution begins. This liquidity extends beyond typical closeout periods imposed by CCPs and is calibrated for stressed collateral calls and payments after entering resolution.
John Williams regularly advises clients on issues related to CCPs and derivatives market infrastructure. He manages content for the FIA CCP Risk Review. Ben Kastner represents financial institutions in structured credit and derivative transactions such as securitizations and credit default swaps.
The full article can be read in the Journal of Financial Market Infrastructures.
