Abstract

http://ssrn.com/abstract=1348343
 
 

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Does a Central Clearing Counterparty Reduce Counterparty Risk?


Darrell Duffie


Stanford University - Graduate School of Business

Haoxiang Zhu


Massachusetts Institute of Technology (MIT) - Sloan School of Management

April 27, 2011

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. Further, clearing different classes of derivatives in separate CCPs always increases counterparty exposures relative to clearing the combined set of derivatives in a single CCP. We provide theory as well as illustrative numerical examples of these results that are calibrated to notional derivatives position data for major banks.

Number of Pages in PDF File: 31

Keywords: central clearing, netting efficiency, counterparty risk, over-the-counter derivatives

JEL Classification: G01, G14, G18, G28

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Date posted: February 23, 2009 ; Last revised: April 28, 2011

Suggested Citation

Duffie, Darrell and Zhu, Haoxiang, Does a Central Clearing Counterparty Reduce Counterparty Risk? (April 27, 2011). Rock Center for Corporate Governance at Stanford University Working Paper No. 46; Stanford University Graduate School of Business Research Paper No. 2022. Available at SSRN: http://ssrn.com/abstract=1348343 or http://dx.doi.org/10.2139/ssrn.1348343

Contact Information

James Darrell Duffie (Contact Author)
Stanford University - Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
650-723-1976 (Phone)
650-725-7979 (Fax)

Haoxiang Zhu
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street E62-623
Cambridge, MA 02142
United States
HOME PAGE: http://www.mit.edu/~zhuh
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