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Comparing the pre-settlement risk implications of alternative clearing arrangements

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  • John P Jackson
  • Mark J Manning

Abstract

In recent years, there has been a marked expansion in the range of products cleared through central counterparty clearing houses, accompanied by a trend towards consolidation in the clearing infrastructure. The financial stability implications of these developments are of considerable policy interest. In this paper, we use a simulation approach to analyse, in a systematic way, the potential pre-settlement cost and risk implications of these developments. Our results point towards substantial risk-reduction benefits from multilateral clearing arrangements, arising from multilateral netting and mutualisation. The paper also examines individual incentives to join multilateral clearing arrangements. We suggest that arrangements with restricted direct participation and tiered membership may be a natural response to the uneven distribution of total pre-settlement costs when agents are of heterogeneous credit quality and it is costly to individually tailor margin.

Suggested Citation

  • John P Jackson & Mark J Manning, 2007. "Comparing the pre-settlement risk implications of alternative clearing arrangements," Bank of England working papers 321, Bank of England.
    • Handle: RePEc:boe:boeewp:321
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    References listed on IDEAS

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    Cited by:

    1. Neuner, Stefan & Schäfer, Klaus, 2011. "Zentrale Gegenparteien für den außerbörslichen Derivatehandel in der Praxis," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2011-02, University of Bayreuth, Chair of Finance and Banking.
    2. Kubitza, Christian & Pelizzon, Loriana & Getmansky, Mila, 2018. "The pitfalls of central clearing in the presence of systematic risk," ICIR Working Paper Series 31/18, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    3. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    4. Matt Gibson, 2013. "Recovery and Resolution of Central Counterparties," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 39-48, December.
    5. Alexandra Heath & Gerard Kelly & Mark Manning, 2013. "OTC Derivatives Reform: Netting and Networks," RBA Annual Conference Volume (Discontinued), in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.),Liquidity and Funding Markets, Reserve Bank of Australia.
    6. Xiaobing Feng & Haibo Hu & Matthew Pritsker, 2014. "Network effects, cascades and CCP interoperability," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 25(09), pages 1-13.
    7. Nathanael Cox & Nicholas Garvin & Gerard Kelly, 2013. "Central Counterparty Links and Clearing System Exposures," RBA Research Discussion Papers rdp2013-12, Reserve Bank of Australia.
    8. Garratt, Rodney & Zimmerman, Peter, 2020. "Centralized netting in financial networks," Journal of Banking & Finance, Elsevier, vol. 112(C).
    9. Rod Garratt & Peter Zimmerman, 2015. "Does central clearing reduce counterparty risk in realistic financial networks?," Staff Reports 717, Federal Reserve Bank of New York.
    10. Hitoshi Hayakawa, 2018. "Does a central clearing counterparty reduce liquidity needs?," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(1), pages 9-50, April.
    11. Galbiati, Marco & Soramäki, Kimmo, 2012. "Clearing networks," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 609-626.
    12. James Hansen & Angus Moore, 2016. "The Efficiency of Central Clearing: A Segmented Markets Approach," RBA Research Discussion Papers rdp2016-07, Reserve Bank of Australia.
    13. Siyi Zhu, 2011. "Is there a 'race to the bottom' in central counterparties competition?," DNB Occasional Studies 906, Netherlands Central Bank, Research Department.

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