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The cost of clearing fragmentation

Author

Listed:
  • Evangelos Benos

    (Bank of England)

  • Wenqian Huang

    (Bank for International Settlements)

  • Albert Menkveld

    (VU Amsterdam)

  • Michalis Vasios

    (Norges Bank Investment Management)

Abstract

Fragmenting clearing across multiple central counter-parties (CCPs) is costly. This is because dealers providing liquidity globally, cannot net trades cleared in different CCPs and this increases their collateral costs. These costs are then passed on to their clients through price distortions which take the form of a price differential (basis) when the same products are cleared in different CCPs. Using proprietary data, we document an economically significant CCP basis for dollar swap contracts cleared both at the Chicago Mercantile Exchange (CME) and the London Clearing House (LCH) and provide empirical evidence consistent with a collateral cost explanation of this basis.

Suggested Citation

  • Evangelos Benos & Wenqian Huang & Albert Menkveld & Michalis Vasios, 2019. "The cost of clearing fragmentation," Bank of England working papers 800, Bank of England.
    • Handle: RePEc:boe:boeewp:0800
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    References listed on IDEAS

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    Cited by:

    1. Inaki Aldasoro & Wenqian Huang & Esti Kemp, 2020. "Cross-border links between banks and non-bank financial institutions," BIS Quarterly Review, Bank for International Settlements, September.
    2. Demange, Gabrielle & Piquard, Thibaut, 2023. "On the choice of central counterparties in the EU," Journal of Financial Markets, Elsevier, vol. 64(C).
    3. Evangelos Benos & Gerardo Ferrara & Angelo Ranaldo, 2022. "Collateral Cycles," Swiss Finance Institute Research Paper Series 22-91, Swiss Finance Institute.
    4. González-Urteaga, Ana & Rubio, Gonzalo, 2022. "Guarantee requirements by European central counterparties and international volatility spillovers," Research in International Business and Finance, Elsevier, vol. 62(C).
    5. Casu, Barbara & Kalotychou, Elena & Katsoulis, Petros, 2025. "Stress testing OTC derivatives: Clearing reforms and market frictions," Journal of Financial Stability, Elsevier, vol. 77(C).

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    More about this item

    Keywords

    Central clearing; CCP basis; collateral; fragmentation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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