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Journal of Financial Stability Vol. 72 2024

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

Mario Bellia1; Giulio Girardi2; Roberto Panzica3; Loriana Pelizzon4,5,6; Tuomas Peltonen7

1 Joint Research Centre · 2 United States Securities and Exchange Commission · 3 Banco de Portugal · 4 Goethe University Frankfurt · 5 Ca' Foscari University of Venice · 6 Leibniz Institute for Financial Research SAFE · 7 European Central Bank

open access

Abstract

This paper empirically analyses whether post-global financial 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 single-name sovereign credit default swap (CDS) transactions and show that both seller and buyer manage counterparty exposures and capital costs, strategically choosing to clear when the counterparty is riskier. The clearing incentives seem particularly responsive to seller credit risk, which is in line with the notion that counterparty credit risk (CCR) is asymmetric in CDS contracts. The riskiness of the underlying reference entity also impacts the decision to clear as it affects both CCR capital charges for OTC contracts and central counterparty clearing house (CCP) margins for cleared contracts. Lastly, we find evidence that when a transaction helps netting positions with the CCP and hence lower margins, the likelihood of clearing is higher.

DOI
10.1016/j.jfs.2024.101247
Volume
72
Pages
101247
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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