Comparing the Pre-Settlement Risk Implications of Alternative Clearing Arrangements

37 Pages Posted: 22 Aug 2007

Date Written: April 2007

Abstract

In recent years, there has been a marked expansion in the range of products cleared through central counterparty clearing houses, accompanied by a trend towards consolidation in the clearing infrastructure. The financial stability implications of these developments are of considerable policy interest. In this paper, we use a simulation approach to analyse, in a systematic way, the potential pre-settlement cost and risk implications of these developments. Our results point towards substantial risk-reduction benefits from multilateral clearing arrangements, arising from multilateral netting and mutualisation. The paper also examines individual incentives to join multilateral clearing arrangements. We suggest that arrangements with restricted direct participation and tiered membership may be a natural response to the uneven distribution of total pre-settlement costs when agents are of heterogeneous credit quality and it is costly to individually tailor margin.

Keywords: Clearing, netting, financial stability, central counterparty

Suggested Citation

Jackson, John P. and Manning, Mark J., Comparing the Pre-Settlement Risk Implications of Alternative Clearing Arrangements (April 2007). Bank of England Working Paper No. 321, Available at SSRN: https://ssrn.com/abstract=1008789 or http://dx.doi.org/10.2139/ssrn.1008789

John P. Jackson (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mark J. Manning

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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