The demand for central clearing: to clear or not to clear, that is the question
- This paper analyses whether the post-crisis regulatory reforms developed by global-standard-setting bodies have created appropriate incentives for different types of market participants to centrally clear Over-The-Counter (OTC) derivative contracts. Beyond documenting the observed facts, we analyze four main drivers for the decision to clear: 1) the liquidity and riskiness of the reference entity; 2) the credit risk of the counterparty; 3) the clearing member’s portfolio net exposure with the Central Counterparty Clearing House (CCP) and 4) post trade transparency. We use confidential European trade repository data on single-name Sovereign Credit Derivative Swap (CDS) transactions, and show that for all the transactions reported in 2016 on Italian, German and French Sovereign CDS 48% were centrally cleared, 42% were not cleared despite being eligible for central clearing, while 9% of the contracts were not clearable because they did not satisfy certain CCP clearing criteria. However, there is a large difference between CCP clearing members that clear about 53% of their transactions and non-clearing members, even those that are subject to counterparty risk capital requirements, that almost never clear their trades. Moreover, we find that diverse factors explain clearing members’ decision to clear different CDS contracts: for Italian CDS, counterparty credit risk exposures matter most for the decision to clear, while for French and German CDS, margin costs are the most important factor for the decision. Clearing members use clearing to reduce their exposures to the CCP and largely clear contracts when at least one of the traders has a high counterparty credit risk.
Author: | Mario BelliaORCiDGND, Roberto Calogero PanzicaGND, Loriana PelizzonORCiDGND, Tuomas PeltonenGND |
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URN: | urn:nbn:de:hebis:30:3-456175 |
URL: | https://ssrn.com/abstract=3116261 |
Parent Title (English): | SAFE working paper series ; No. 193 |
Series (Serial Number): | SAFE working paper (193) |
Publisher: | SAFE |
Place of publication: | Frankfurt am Main |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2018 |
Year of first Publication: | 2018 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2018/02/06 |
Tag: | Central Counterparty Clearing House (CCP); Credit Default Swap (CDS); European Market Infrastructure Regulation (EMIR); Sovereign |
Issue: | version: January 19, 2018 |
Page Number: | 59 |
Note: | First Version: June 1, 2017 ; This version: January 19, 2018 |
HeBIS-PPN: | 426537823 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |