Loss sharing in central clearinghouses: Winners and losers

Arbeitspapier

Central clearing counterparties (CCPs) were created to reduce default losses for market participants in derivatives markets. We show that not all market participants benefit, and some are worse off. Loss sharing rules and their interaction with market network structure affect who are winners and losers. The loss sharing rule most widely used by CCPs is based on net risk. We develop a simple model which shows that this rule largely benefits market participants with flat portfolios but not participants with directional portfolios or those located in the periphery of the network. This result is consistent with the reluctance of (peripheral) end-users to voluntarily clear in practice. We investigate how to offset cross-sectional differences in loss sharing benefits, and highlight alternative loss sharing rules and centralized trading as potential remedies.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECONtribute Discussion Paper ; No. 066

Classification and Topics

• Classification: Wirtschaft ; General Financial Markets: Government Policy and Regulation ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Financial Institutions and Services: Government Policy and Regulation ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Central Clearing ; Counterparty Risk ; Loss Sharing ; OTC markets ; Derivatives

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kubitza, Christian ; Pelizzon, Loriana ; Getmansky, Mila
• Event: Veröffentlichung
• (who): University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)
• (where): Bonn and Cologne
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/231491
• Last update: 10.03.2025, 11:45 AM CET