The impact of the leverage ratio on client clearing

Jonathan Smith (), Gerardo Ferrara and Francesc Rodríguez Tous
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Jonathan Smith: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 735, Bank of England working papers from Bank of England

Abstract: As part of the post-crisis regulatory reform, many interest-rate derivative transactions are required to be centrally cleared. Nevertheless, the treatment of this type of transaction under the leverage ratio (LR) requirement does not allow for the use of initial margin to reduce the exposure, thereby increasing capital costs. As a result, LR affected clearing member banks may be more reluctant to provide central clearing services to clients given this additional cost. This in turn can prevent some real economy firms from hedging their risks. We analyse whether this is the case by exploiting detailed confidential transaction and portfolio level data as well as the introduction and posterior tightening of the LR in the UK in a diff-in-diff framework. Our results suggest that the LR had a disincentivising effect on client clearing, both in terms of daily transactions as well as the number of clients, but this impact seems to be driven by a reduced willingness to take on new clients.

Keywords: Financial regulation; leverage ratio; interest rate derivatives; clearing; banking (search for similar items in EconPapers)
JEL-codes: G01 G18 G20 G28 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2018-06-15
New Economics Papers: this item is included in nep-ban and nep-knm
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Citations: View citations in EconPapers (11)

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