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Insurers to Sit at the End of the CCP Waterfall?

Bloomberg is reporting that a group of about 20 insurers, acting through NY-based underwriter GCSA LLC, are set to offer between USD 6 billion and USD 10 billion of insurance to central counterparties (CCPs).

Does the development fundamentally address the issue of “too big to fail” or is it really just a case of kicking the can down the road?  Worse yet, will it actually create new avenues through which contagion risk can spread?  Only time will tell.  The article suggests that, for the time being at least, the insurance on offer would only cover losses after all other resources in the waterfall had been exhausted and would be paid for by insurance companies using their own money.  Moreover, according to the report at least, the insurers within the group of 20 are not “connected to the derivatives market or the banks that serve as members of clearinghouses”.  Financial innovations tend to begin life in their most simple form.  Complexity (and risk) tends to be layered on slightly further down the road, so it will be interesting to see how this product develops over the next couple of years.


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