Pitfalls of central clearing in the presence of systematic risk

Arbeitspapier

Through the lens of market participants' objective to minimize counterparty risk, we investigate central clearing in derivatives markets, and its interaction with systematic risk, portfolio directionality, and loss sharing. Previous studies suggest that central clearing always reduces counterparty risk for a sufficiently large number of clearing members. We show that this is not the case - mostly because of loss sharing. Central clearing can increase counterparty risk, particularly during extreme market events, for traders with directional portfolios, and because CCPs mutualize default losses. Our results are consistent with the reluctance to clear derivative trades in the absence of a clearing obligation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SAFE Working Paper ; No. 235

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Information and Market Efficiency; Event Studies; Insider Trading ; General Financial Markets: Government Policy and Regulation ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Central Clearing ; Counterparty Risk ; Systematic Risk ; OTC markets ; Derivatives ; Margin

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kubitza, Christian ; Pelizzon, Loriana ; Getmansky Sherman, Mila
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe
• (where): Frankfurt a. M.
• (when): 2019

Further information

• DOI: doi:10.2139/ssrn.3278582
• Handle: http://hdl.handle.net/10419/203320
• Last update: 10.03.2025, 11:44 AM CET