Counterparty default risk might hamper trade and trigger a financial crisis. The introduction of a central clearing counterparty (CCP) benefits trading but pushes systemic risk into CCP default. Standard risk management strategies at CCPs currently overlook a risk associated with crowded trades....

If all intermediaries enter the same market-making “bet” on the same side, fast-moving capital gets tied up in a crowded trade. This creates systemic risk for a central clearing party (CCP) since multiple traders might default when the bet turns extremely sour. The CCP then has to unwind the...