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Participants’ preferences for settlement netting of derivatives contracts

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  • Takino, Kazuhiro

Abstract

This study examines market participants’ preference for netting when settling derivatives contracts by using social welfare, defined as the sum of all participants’ utilities. Equilibrium models are constructed for derivatives and margins with/without netting via participants’ utility maximization problems. The utilities and social welfare in equilibrium are then numerically computed. The numerical results demonstrate that netting reduces the required margin amount. However, when the posting margin’s funding cost equals the return on margin received, market participants exhibit no netting preference. By contrast, when the funding cost exceeds the return, all market participants prefer netting.

Suggested Citation

  • Takino, Kazuhiro, 2025. "Participants’ preferences for settlement netting of derivatives contracts," Finance Research Letters, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:finlet:v:73:y:2025:i:c:s1544612324016982
    DOI: 10.1016/j.frl.2024.106669
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    References listed on IDEAS

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    1. Philipp Haene & Andy Sturm, 2009. "Optimal Central Counterparty Risk Management," Working Papers 2009-07, Swiss National Bank.
    2. Bellia, Mario & Girardi, Giulio & Panzica, Roberto & Pelizzon, Loriana & Peltonen, Tuomas, 2024. "The demand for central clearing: To clear or not to clear, that is the question!," Journal of Financial Stability, Elsevier, vol. 72(C).
    3. Berlinger, Edina & Bihary, Zsolt & Dömötör, Barbara, 2024. "Dynamic margin optimization," Finance Research Letters, Elsevier, vol. 68(C).
    4. Ghamami, Samim & Glasserman, Paul, 2017. "Does OTC derivatives reform incentivize central clearing?," Journal of Financial Intermediation, Elsevier, vol. 32(C), pages 76-87.
    5. Garratt, Rodney & Zimmerman, Peter, 2020. "Centralized netting in financial networks," Journal of Banking & Finance, Elsevier, vol. 112(C).
    6. Che Sidanius & Filip Zikes, 2012. "Financial Stability Paper No 18: OTC derivatives reform and collateral demand impact," Bank of England Financial Stability Papers 18, Bank of England.
    7. Fiedor, Paweł, 2018. "Clearinghouse-Five: determinants of voluntary clearing in European derivatives markets," ESRB Working Paper Series 72, European Systemic Risk Board.
    8. Jessie Jiaxu Wang & Agostino Capponi & Hongzhong Zhang, 2022. "A Theory of Collateral Requirements for Central Counterparties," Management Science, INFORMS, vol. 68(9), pages 6993-7017, September.
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    More about this item

    Keywords

    Netting of derivatives settlements; Counterparty risks; General equilibrium;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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