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The demand for central clearing: To clear or not to clear, that is the question

Author

Listed:
  • Bellia, Mario
  • Girardi, Giulio
  • Panzica, Roberto
  • Pelizzon, Loriana
  • Peltonen, Tuomas

Abstract

This paper is a first attempt at empirically analyzing whether post-crisis regulatory reforms have created appropriate incentives to voluntarily centrally clear Over-The-Counter (OTC) derivative contracts. We use confidential European trade repository data on singlename sovereign Credit Derivative Swap (CDS) transactions and show that both the seller and the buyer manage counterparty's exposures and capital costs, strategically choosing to clear when the counterparty is riskier. The clearing incentives seem particularly responsive to seller's credit risk, in line with the notion that counterparty credit risk is asymmetric in CDS contracts. The riskiness of the underlying reference entity also enters the decision to clear as it affects both Counterparty Credit Risk (CCR) capital charges for OTC contracts and CCP margins for cleared contracts. Lastly, we find evidence that when the transaction helps netting positions with the CCP, and hence lower margins, the likelihood to clear is higher.

Suggested Citation

  • Bellia, Mario & Girardi, Giulio & Panzica, Roberto & Pelizzon, Loriana & Peltonen, Tuomas, 2019. "The demand for central clearing: To clear or not to clear, that is the question," SAFE Working Paper Series 193, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  • Handle: RePEc:zbw:safewp:193
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    References listed on IDEAS

    as
    1. Loon, Yee Cheng & Zhong, Zhaodong Ken, 2014. "The impact of central clearing on counterparty risk, liquidity, and trading: Evidence from the credit default swap market," Journal of Financial Economics, Elsevier, vol. 112(1), pages 91-115.
    2. Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256.
    3. Arora, Navneet & Gandhi, Priyank & Longstaff, Francis A., 2012. "Counterparty credit risk and the credit default swap market," Journal of Financial Economics, Elsevier, vol. 103(2), pages 280-293.
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    5. Mayordomo, Sergio & Posch, Peter N., 2016. "Does central clearing benefit risky dealers?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 91-100.
    6. Olga Lewandowska, 2015. "OTC Clearing Arrangements for Bank Systemic Risk Regulation: A Simulation Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1177-1203, September.
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    Citations

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    Cited by:

    1. Gündüz, Yalin, 2018. "Mitigating counterparty risk," Discussion Papers 35/2018, Deutsche Bundesbank.
    2. Fiedor, Pawel & Killeen, Neill, 2019. "Securitisation special purpose entities, bank sponsors and derivatives," Research Technical Papers 5/RT/19, Central Bank of Ireland.
    3. 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).
    4. Gino Cenedese & Angelo Ranaldo & Michalis Vasios, 2018. "OTC Premia," Working Papers on Finance 1818, University of St. Gallen, School of Finance, revised May 2019.
    5. Fiedor, Paweł, 2018. "Clearinghouse-Five: determinants of voluntary clearing in European derivatives markets," ESRB Working Paper Series 72, European Systemic Risk Board.
    6. Haselmann, Rainer & Krahnen, Jan Pieter & Wahrenburg, Mark, 2019. "Evaluierung gesamt- und finanzwirtschaftlicher Effekte der Reformen europäischer Finanzmarktregulierung im deutschen Finanzsektor seit der Finanzkrise," SAFE Policy Reports 1, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    7. Dalla Fontana, Silvia & Holz auf der Heide, Marco & Pelizzon, Loriana & Scheicher, Martin, 2019. "The anatomy of the euro area interest rate swap market," Working Paper Series 2242, European Central Bank.

    More about this item

    Keywords

    Credit Default Swap (CDS); Central Counterparty Clearing House (CCP); European Market Infrastructure Regulation (EMIR); Sovereign;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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