In this paper, we study how the impact of a cyber attack that paralyzes the ability of one or more banks to send payments would be transmitted to other banks through the Canadian wholesale payment system. Based on historical payment data, we simulate a wide range of scenarios and evaluate the total payment disruption in the system. We find that, depending on the type and number of banks under attack, the time of the attack and the design of the payment system, an attack can in some cases quickly become systemic and result in a significant loss of liquidity in the system. For instance, a three-hour attack on one bank can in a worst-case scenario impair the payments capacity of seven other banks within less than an hour and eventually disrupt 25% of the daily payments value. We also demonstrate that the system-wide impact of an attack can be significantly reduced by contingency plans that enable attacked banks to continue to send high-value payments. Given the interconnectedness of banks, we conclude that the cyber resilience of a wholesale payment system strongly depends on the cyber resilience of its participants and we underline the importance of strong sectoral collaboration and coordination.

We establish generalized autoregressive conditional heteroscedasticity–dynamic conditional correlation (GARCH–DCC) and constant conditional correlation (CCC) copula model frameworks to study time-varying correlation among credit default swap (CDS) single names (SNs) and its impact on certain risk measures of CDS portfolios that consist of names from different sectors within the eurozone (EU) and North America (NA). Our purpose is to better understand the direction and magnitude of impacts on such risk measures due to correlation changes. This study covers 188 NA SNs and 145 EU SNs from January 2008 to August 2017. We find that correlations between CDS SNs go through different correlation regimes during this period. As a result, CDS portfolio risk measures in the form of value-at-risk or expected shortfall show sizable variation due to correlation regime shifts from historical means. Depending on the correlation level (high or low) and the portfolio type, risk measures could be either underestimated or overestimated. Both directional and balanced portfolios could experience a sizable underestimation of the margin depending on the direction in which the correlation deviates from historical means.

At the Pittsburgh Summit in 2009, G20 leaders agreed to wide-reaching reforms to over-the-counter (OTC) derivatives markets. One of these reforms required the clearing of standardized OTC derivatives through central counterparties (CCPs). Since then, CCPs have become increasingly important. There has been an extensive programme of regulatory change affecting CCPs, OTC derivatives markets and their participants. As OTC clearing has grown, tension has increased between different classes of market participants over the traditional CCP model of resource provision through loss mutualization. We argue that most of this tension can be explained by a misalignment between the policy goal of enhancing financial stability and the delivery of that goal by mandating clearing through CCPs as they are currently organized. Specifically, the traditional model for resource provision makes most CCPs suitable for managing “club goods”, whereas financial stability is a “public good”. The key differences between these two types of goods, driven by the wedge between those who pay for them and those who derive the benefits, create the observed tensions. Based on this analysis, we propose a framework to analyze the functional elements of a CCP and examine whether an alternative clearing model might be more effective. We conclude that incentives would be better aligned if the functions of CCPs were unbundled and the ownership and funding structures that best suit their individual characteristics were selected. Functions that are critical for the provision of financial stability might suggest some form of public sector involvement, whereas other services might lend themselves to a for-profit or traditional club model.