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

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  • 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, Leibniz Institute for Financial Research SAFE.
  • Handle: RePEc:zbw:safewp:193
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    References listed on IDEAS

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    Cited by:

    1. Christian Kubitza & Loriana Pelizzon & Mila Getmansky Sherman, 2021. "Loss Sharing in Central Clearinghouses: Winners and Losers," ECONtribute Discussion Papers Series 066, University of Bonn and University of Cologne, Germany.
    2. 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).
    3. Cenedese, Gino & Ranaldo, Angelo & Vasios, Michalis, 2020. "OTC premia," Journal of Financial Economics, Elsevier, vol. 136(1), pages 86-105.
    4. Fiedor, Paweł, 2018. "Clearinghouse-Five: determinants of voluntary clearing in European derivatives markets," ESRB Working Paper Series 72, European Systemic Risk Board.
    5. Gabrielle Demange & Thibaut Piquard, 2021. "On the market structure of central counterparties in the EU," Working Papers halshs-03107812, HAL.
    6. Haselmann, Rainer & Krahnen, Jan Pieter & Wahrenburg, Mark, 2019. "Evaluierung gesamt- und finanzwirtschaftlicher Effekte der Reformen europäischer Finanzmarktregulierung im deutschen Finanzsektor seit der Finanzkrise: Zusammenfassung der wichtigsten Ergebnisse," SAFE Policy Reports 2, Leibniz Institute for Financial Research SAFE.
    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.
    8. Fiedor, Paweł & Killeen, Neill, 2019. "Securisation special purpose entities, bank sponsors and derivatives," ESRB Working Paper Series 99, European Systemic Risk Board.
    9. Gündüz, Yalin, 2018. "Mitigating counterparty risk," Discussion Papers 35/2018, Deutsche Bundesbank.
    10. Torsten Ehlers & Bryan Hardy, 2019. "The evolution of OTC interest rate derivatives markets," BIS Quarterly Review, Bank for International Settlements, December.

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    More about this item

    Keywords

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

    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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