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

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

No 193, SAFE Working Paper Series from Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt

Abstract: This paper is a first attempt at empirically analyzing whether post-crisis regulatory reforms have created appropriate incentives to voluntarily centrally clear Over-The-Counter (OTC) derivative contracts. We use confidential European trade repository data on singlename sovereign Credit Derivative Swap (CDS) transactions and show that both the seller and the buyer manage counterparty's exposures and capital costs, strategically choosing to clear when the counterparty is riskier. The clearing incentives seem particularly responsive to seller's credit risk, in line with the notion that counterparty credit risk is asymmetric in CDS contracts. The riskiness of the underlying reference entity also enters the decision to clear as it affects both Counterparty Credit Risk (CCR) capital charges for OTC contracts and CCP margins for cleared contracts. Lastly, we find evidence that when the transaction helps netting positions with the CCP, and hence lower margins, the likelihood to clear is higher.

Keywords: Credit Default Swap (CDS); Central Counterparty Clearing House (CCP); European Market Infrastructure Regulation (EMIR); Sovereign (search for similar items in EconPapers)
JEL-codes: G18 G28 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
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Working Paper: The demand for central clearing: to clear or not to clear, that is the question (2017) Downloads
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