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Centralized Clearing for Over-the-Counter Derivatives

Author

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  • Rausser, Gordon C.
  • Balson, William
  • Stevens, Reid

Abstract

Purpose - Systemic risk propagated through over‐the‐counter (OTC) derivatives can best be managed by a public‐private central counterparty clearing house. The purpose of this paper is to outline the market microstructure necessary for such a clearing house. Design/methodology/approach - The paper proposes using an request for quote platform with an active permissioning system that uses analytic approximations based on Monte Carlo simulation to estimate default risk and a two‐part pricing scheme to efficiently price that risk. Findings - It is found that comprehensive clearing for complex and standardized derivatives is feasible using the clearing framework. Research limitations/implications - This research is limited by the authors' ability to give empirical examples. The paper gives a short example with data, but given the constraints on length, cannot go into more detail. Practical implications - This comprehensive clearing structure, in contrast to current proposed government regulations, will not drive out the “good” with the “bad” OTC derivative instruments. Originality/value - This is the only paper the authors are aware of that outlines a detailed framework for clearing all OTC derivatives.
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Suggested Citation

  • Rausser, Gordon C. & Balson, William & Stevens, Reid, "undated". "Centralized Clearing for Over-the-Counter Derivatives," CUDARE Working Papers 120533, University of California, Berkeley, Department of Agricultural and Resource Economics.
    • Handle: RePEc:ags:ucbecw:120533
    DOI: 10.22004/ag.econ.120533
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    References listed on IDEAS

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    2. Karel Janda & Gordon Rausser, 2011. "Comparing American and European Regulation of Over-the- Counter Derivative Securities," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2011(4), pages 7-19.
    3. Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012. "When Lower Risk Increases Profit: Competition and Control of a Central Counterparty," Staff Working Papers 12-35, Bank of Canada.
    4. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Discussion Paper 2020-028, Tilburg University, Center for Economic Research.

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