Pitfalls of central clearing in the presence of systematic risk

Christian Kubitza, Loriana Pelizzon () and Mila Getmansky Sherman

No 235, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: Through the lens of market participants' objective to minimize counterparty risk, we investigate central clearing in derivatives markets, and its interaction with systematic risk, portfolio directionality, and loss sharing. Previous studies suggest that central clearing always reduces counterparty risk for a sufficiently large number of clearing members. We show that this is not the case - mostly because of loss sharing. Central clearing can increase counterparty risk, particularly during extreme market events, for traders with directional portfolios, and because CCPs mutualize default losses. Our results are consistent with the reluctance to clear derivative trades in the absence of a clearing obligation.

Keywords: Central Clearing; Counterparty Risk; Systematic Risk; OTC markets; Derivatives; Margin (search for similar items in EconPapers)
JEL-codes: G01 G14 G18 G28 (search for similar items in EconPapers)
Date: 2019, Revised 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/203320/1/safe-wp-235_201909.pdf (application/pdf)

Related works:
Working Paper: The pitfalls of central clearing in the presence of systematic risk (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:235

DOI: 10.2139/ssrn.3278582

Access Statistics for this paper

More papers in SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().