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CDS spreads in the aftermath of central clearing

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  • Orçun Kaya

Abstract

In an attempt to understand the impact of derivative market reforms, this paper focuses on the spreads of centrally cleared CDSs using a unique data set of voluntarily cleared non-financial single-name contracts over the period from January 2009 to June 2013. Controlling for a number of factors that previous studies identified as important determinants of credit risk, my results indicate that CDS spreads widen with the initiation of central clearing. I document that even though dealer risk is priced in CDS spreads and an increase in dealer risk narrows spreads, the initiation of central clearing does not necessarily change the pricing of counterparty risk for CDSs written on non-financial firms. On the contrary, I provide evidence that CDS volatility and central clearing widen CDS spreads jointly. Because the margin requirements of CCPs depend heavily on CDS spread variations observed in the past, observed widening in spreads is potentially caused by the collateral costs related to central clearing.

Suggested Citation

  • Orçun Kaya, 2017. "CDS spreads in the aftermath of central clearing," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 6(2), pages 75-101.
    • Handle: RePEc:ids:ijfmkd:v:6:y:2017:i:2:p:75-101
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    Cited by:

    1. Akari, Mohamed-Ali & Ben-Abdallah, Ramzi & Breton, Michèle & Dionne, Georges, 2021. "The impact of central clearing on the market for single-name credit default swaps," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    2. Paulo Pereira da Silva & Carlos Vieira & Isabel Vieira, 2018. "Central clearing and CDS market quality," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(6), pages 731-753, June.

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