Unintended Consequences of Regulating Central Clearing

Pablo D'Erasmo, Selman Erol and Guillermo Ordonez

No 25-24, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Recent U.S. and European regulations promote centrally clearing derivatives to reduce complexity and systemic risk in the financial system. We argue that more clearing does not guarantee less systemic risk. We identify conditions under which the core clears less intensively than the periphery, which increases systemic risk by substituting multilateral netting for bilateral netting and making contagion less likely to start in the core but more likely to spread from the core. We study confidential derivatives regulatory data and find evidence of such clearing patterns. We further explore the implications of complexity and centrality within the financial system for stability

Keywords: Central Clearing; Systemic Risk; Interbank Networks; Central Counterparty (CCP); Over-the-Counter Trading (OTC) (search for similar items in EconPapers)
JEL-codes: E50 G20 L14 (search for similar items in EconPapers)
Pages: 61
Date: 2025-08-25
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DOI: 10.21799/frbp.wp.2025.24

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