Does central clearing affect counterparty risk and liquidity risk in the sovereign CDS market?

44 Pages Posted: 9 Jul 2019 Last revised: 12 Oct 2022

See all articles by Josephine Molleyres

Josephine Molleyres

Swiss National Bank (SNB)

Heinz Zimmermann

University of Basel - Faculty of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 11, 2022

Abstract

Central counterparty clearing houses (CCPs) provide risk management for OTC transactions. Using a global sample of sovereign credit default swaps (CDS) issued between 2010 and 2017, this paper analyzes the impact of the structural shift from over-the-counter to voluntary CCP clearing of single-name CDS in late 2013 on CDS pricing. The results suggest that sovereign CDS spreads are insignificantly affected by counterparty risk when a large fraction of globally outstanding sovereign CDS is cleared through CCPs. Therefore, CCP clearing mitigates a major source of systemic risk in the CDS market. In contrast, CCP clearing has no significant effect on CDS market liquidity. Moreover, CDS spreads are mainly driven by local factors as opposed to global factors.

Keywords: Credit default swaps, central counterparty clearing, sovereign credit risk, counterparty risk, liquidity risks, systemic risk

JEL Classification: G15, G18, G23, G32

Suggested Citation

Molleyres, Josephine and Zimmermann, Heinz, Does central clearing affect counterparty risk and liquidity risk in the sovereign CDS market? (October 11, 2022). Available at SSRN: https://ssrn.com/abstract=3415563 or http://dx.doi.org/10.2139/ssrn.3415563

Josephine Molleyres

Swiss National Bank (SNB) ( email )

Bundesplatz 1
Bern, CH-3001
Switzerland
+41764596419 (Phone)

Heinz Zimmermann (Contact Author)

University of Basel - Faculty of Business and Economics ( email )

Peter Merian Weg 6
Basel, 4002
Switzerland
+41 61 267 33 16 (Phone)
+41 61 267 08 98 (Fax)

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