This paper investigates the systemic impact of central clearing in the presence of counterparty credit risk. This is done by utilizing a statistical model of a financial network in which edge weights represent the sensitivities of one participant’s failure to its counterparties’ default likelihood. The reduced-form model specifies the mechanism of systemic risk concentration under central clearing in that the introduction of a central counterparty into a market redistributes the probability mass of the systemic failure from the center of the distribution into its tail. Numerical illustrations with a novel importance sampling technique shed light on a policy-oriented implication towards regulating the adverse dependence between risk concentration under central clearing and the resiliency of the financial system via proper margin policies at a collective level.​

Keywords: Central Clearing; Systemic Risk; Measure Change; Tail Risk Concentration; Monte Carlo Simulation; Margin Policy; Goal Programming
JEL Codes: C15, C46, C61, G17, G23​