Liquidity and Central Clearing: Evidence from the CDS Market
An international initiative to increase the use of central clearing for OTC derivatives emerged as one of the reactions to the 2008 financial crisis. The move to central clearing is a fundamental change in the structure of the market. Central clearing will help control counterparty credit risk, but it also has potential implications for market liquidity. We analyze the relationship between liquidity and central clearing using information on credit default swap clearing at ICE Trust and ICE Clear Europe. We find that the central counterparty chooses the most liquid contracts for central clearing, consistent with liquidity characteristics being important in determining the safety and efficiency of clearing. We further find that the introduction of central clearing is associated with a slight increase in the liquidity of a contract. This is consistent with two countervailing effects. On one hand, central clearing will likely increase collateral requirements relative to the pre-reform bilaterally-cleared market, thereby increasing clearing costs and possibly reducing the liquidity of the market. On the other hand, improved management of counterparty credit risk, increased transparency and operational efficiencies at central counterparties could bring more competition into OTC derivative markets and serve to increase liquidity.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada|
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Craig Doidge & G. Andrew Karolyi & Karl V. Lins & Darius P. Miller & René M. Stulz, 2009.
"Private Benefits of Control, Ownership, and the Cross-listing Decision,"
Journal of Finance,
American Finance Association, vol. 64(1), pages 425-466, 02.
- Doidge, Craig & Karolyi, G. Andrew & Lins, Karl V. & Millers, Darius P. & Stulz, Rene M., 2005. "Private Benefits of Control, Ownership, and the Cross-Listing Decision," Working Paper Series 2005-2, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Craig Doidge & G. Andrew Karolyi & Karl V. Lins & Darius P. Miller & Rene M. Stulz, 2005. "Private Benefits of Control, Ownership, and the Cross-Listing Decision," NBER Working Papers 11162, National Bureau of Economic Research, Inc.
- Doidge, Craig & Karolyi, G. Andrew & Lins, Karl V. & Miller, Darius & Stulz, Rene M., 2005. "Private Benefits of Control, Ownership, and the Cross-Listing Decision," Working Papers 05-1, University of Pennsylvania, Wharton School, Weiss Center.
- Jonathan Witmer, 2008. "An Examination of Canadian Firms Delisting from U.S. Exchanges," Staff Working Papers 08-11, Bank of Canada.
- Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012.
"Access, Competition and Risk in Centrally Cleared Markets,"
Bank of Canada Review,
Bank of Canada, vol. 2012(Autumn), pages 3-13.
- Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012. "Access, Competition and Risk in Centrally Cleared Markets," Bank of Canada Review, Bank of Canada, vol. 2012(Autumn), pages 14-22.
- Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-24, January.
- Pagano, Marco & Röell, Ailsa A & Zechner, Josef, 2001.
"The Geography of Equity Listing: Why Do Companies List Abroad?,"
CEPR Discussion Papers
2681, C.E.P.R. Discussion Papers.
- Marco Pagano & Ailsa A. Röell & Josef Zechner, 2002. "The Geography of Equity Listing: Why Do Companies List Abroad?," Journal of Finance, American Finance Association, vol. 57(6), pages 2651-2694, December.
- Marco Pagano & Ailsa A. Roell & Joseph Zechner, 1999. "The Geography of Equity Listing; Why Do Companies List Abroad?," CSEF Working Papers 28, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Sep 2001.
- Lawrence R. Glosten & Paul R. Milgrom, 1983.
"Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders,"
570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
- Manmohan Singh, 2010. "Collateral, Netting and Systemic Risk in the OTC Derivatives Market," IMF Working Papers 10/99, International Monetary Fund.
- Qiu, Jiaping & Yu, Fan, 2012. "Endogenous liquidity in credit derivatives," Journal of Financial Economics, Elsevier, vol. 103(3), pages 611-631.
- Stewart Mayhew & Vassil Mihov, 2004. "How Do Exchanges Select Stocks for Option Listing?," Journal of Finance, American Finance Association, vol. 59(1), pages 447-471, 02.
- Baker, H. Kent & Nofsinger, John R. & Weaver, Daniel G., 2002. "International Cross-Listing and Visibility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(03), pages 495-521, September.
- Kathryn Chen & Michael J. Fleming & John Jackson & Ada Li & Asani Sarkar, 2011. "An analysis of CDS transactions: implications for public reporting," Staff Reports 517, Federal Reserve Bank of New York.
- Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-69, December.
- Alberto Abadie & Guido W. Imbens, 2006. "Large Sample Properties of Matching Estimators for Average Treatment Effects," Econometrica, Econometric Society, vol. 74(1), pages 235-267, 01.
- Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
- James J. Heckman & Hidehiko Ichimura & Petra E. Todd, 1997. "Matching As An Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Oxford University Press, vol. 64(4), pages 605-654.
- Ashcraft, Adam B. & Santos, João A.C., 2009. "Has the CDS market lowered the cost of corporate debt?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 514-523, May.
When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:12-38. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.