To Be or Not to Be? The Questionable Benefits of Mutual Clearing Agreements for Derivatives

Magdalena Tywoniuk
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Magdalena Tywoniuk: Swiss Finance Institute, Students; University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute, Students

No 20-72, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Recently, for standard asset classes, the first mutual clearing agreements between Central Coun- terparties (CCPs) have come into existence. There are already global concerns over the unique threats and benefits which arise from these situations, and further concern for an extension of agree- ments to derivatives CCPs. This paper applies the current mutual agreement framework to credit default swaps (derivatives) CCPs and compares this to clearing without any such agreement. Key results concern: The magnitude of price dispersion between multiple CCPs (as trading moves asset prices away from fundamental value), the magnitude of default contagion, the price impact of pre- dation, and the disciplinary mechanism inherent in the mutual cross-margin fund (between CCPs). Current regulatory debate, concerning the safety of permitting use of the default fund to meet inter-CCP shortfalls, is settled. Finally, a large-scale dynamic simulation models the price process – through variation margin exchange – and provides real-world policy/regulatory implications for a variety of market liquidity states.

Keywords: Mutual Agreement; Price Dispersion; Systemic Risk; CDS; Liquidation; Predation; Price Impact; Contagion; Financial Network; Over the Counter Markets (search for similar items in EconPapers)
JEL-codes: G00 G01 G02 G10 G14 G18 G20 G23 G33 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2020-08
New Economics Papers: this item is included in nep-cmp
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2072

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