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Does a Central Clearing Counterparty Reduce Counterparty Risk?
Darrell Duffie Stanford University - Graduate School of Business Haoxiang Zhu Stanford Graduate School of Business March 4, 2010 Rock Center for Corporate Governance at Stanford University Working Paper No. 46 Stanford University Graduate School of Business Research Paper No. 2022 Abstract: We show whether central clearing of a particular class of derivatives lowers counterparty risk. For plausible cases, adding a central clearing counterparty (CCP) for a class of derivatives such as credit default swaps reduces netting efficiency, leading to an increase in average exposure to counterparty default. Clearing two or more different classes of derivatives in separate CCPs always increases counterparty exposures relative to clearing the combined set of derivatives in a single CCP.
Keywords: central clearing, netting efficiency, counterparty risk, over-the-counter markets JEL Classifications: G01, G14, G18, G28 Working Paper SeriesDate posted: February 23, 2009 ; Last revised: March 10, 2010Suggested CitationContact Information
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