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The cost of clearing fragmentation

Evangelos Benos (), Wenqian Huang (), Albert Menkveld () and Michalis Vasios
Additional contact information
Evangelos Benos: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Wenqian Huang: Bank for International Settlements

No 800, Bank of England working papers from Bank of England

Abstract: Fragmenting clearing across multiple central counter-parties (CCPs) is costly. This is because dealers providing liquidity globally, cannot net trades cleared in different CCPs and this increases their collateral costs. These costs are then passed on to their clients through price distortions which take the form of a price differential (basis) when the same products are cleared in different CCPs. Using proprietary data, we document an economically significant CCP basis for dollar swap contracts cleared both at the Chicago Mercantile Exchange (CME) and the London Clearing House (LCH) and provide empirical evidence consistent with a collateral cost explanation of this basis.

Keywords: Central clearing; CCP basis; collateral; fragmentation (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-05-31, Revised 2019-11-22
New Economics Papers: this item is included in nep-mst
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