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

Arbeitspapier

This paper empirically analyses whether post-global financial crisis regulatory reforms have created appropriate incentives to voluntarily centrally clear the 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 the seller and the 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 enters 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SAFE Working Paper ; No. 193

Classification and Topics

• Classification: Wirtschaft ; General Financial Markets: Government Policy and Regulation ; Financial Institutions and Services: Government Policy and Regulation ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: Credit Default Swap (CDS) ; Central Counterparty Clearing House (CCP) ; European Market Infrastructure Regulation (EMIR) ; Sovereign CDS

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bellia, Mario ; Girardi, Giulio ; Panzica, Roberto Calogero ; Pelizzon, Loriana ; Peltonen, Tuomo
• Event: Veröffentlichung
• (who): Leibniz Institute for Financial Research SAFE
• (where): Frankfurt a. M.
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/268746
• Last update: 10.03.2025, 11:41 AM CET