The Collateral Costs of Clearing

Cyril Monnet and Thomas Nellen

Journal of Money, Credit and Banking, 2021, vol. 53, issue 5, 939-970

Abstract: We study three generic clearing arrangements in the presence of two‐sided limited commitment: simple bilateral clearing, segregated collateral clearing through a third party, and—most sophisticated—central counterparty (CCP) clearing. Clearing secures the settlement of obligations from over‐the‐counter forward contracts that smooth the income of risk‐averse traders. Clearing requires collateral to guarantee settlement; this is costly, as it reduces income from investment. More sophisticated clearing arrangements require more collateral. As a result, the welfare gains of CCP clearing may be mostly due to segregation, while mutualization of losses could contribute little to welfare.

Date: 2021
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https://doi.org/10.1111/jmcb.12802

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Working Paper: The Collateral Costs of Clearing (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:53:y:2021:i:5:p:939-970

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