The demand for central clearing: To clear or not to clear, that is the question

Mario Bellia, Giulio Girardi, Roberto Calogero Panzica, Loriana Pelizzon () and Tuomo Peltonen

No 193, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper empirically analyses whether post-global financial crisis regulatory reforms have created appropriate incentives to voluntarily centrally clear the over-the-counter (OTC) derivative contracts. We use confidential European trade repository data on single-name sovereign credit default swap (CDS) transactions and show that both the seller and the buyer manage counterparty exposures and capital costs, strategically choosing to clear when the counterparty is riskier. The clearing incentives seem particularly responsive to seller credit risk, which is in line with the notion that counterparty credit risk (CCR) is asymmetric in CDS contracts. The riskiness of the underlying reference entity also enters the decision to clear as it affects both CCR capital charges for OTC contracts and central counterparty clearing house (CCP) margins for cleared contracts. Lastly, we find evidence that when a transaction helps netting positions with the CCP and hence lower margins, the likelihood of clearing is higher.

Keywords: Credit Default Swap (CDS); Central Counterparty Clearing House (CCP); European Market Infrastructure Regulation (EMIR); Sovereign CDS (search for similar items in EconPapers)
JEL-codes: G18 G28 G32 (search for similar items in EconPapers)
Date: 2022, Revised 2022
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: The demand for central clearing: To clear or not to clear, that is the question! (2024)
Working Paper: The demand for central clearing: to clear or not to clear, that is the question (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:193

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