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Central Clearing and Collateral Demand

39 Pages Posted: 1 Feb 2014 Last revised: 16 Apr 2014

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Martin Scheicher

European Central Bank (ECB)

Guillaume Vuillemey

HEC Paris - Finance Department

Multiple version iconThere are 3 versions of this paper

Date Written: January 31, 2014

Abstract

We use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations. We decompose collateral demand for both customers and dealers into several key components, including the “velocity drag” associated with variation margin movements. We demonstrate the impact on collateral demand of more widespread initial margin requirements, increased novation of CDS to central clearing parties (CCPs), an increase in the number of clearing members, the proliferation of CCPs of both specialized and non-specialized types, and client clearing. Among other results, we show that system-wide collateral demand is increased significantly by the application of initial margin requirements for dealers, whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements, however, mandatory central clearing is shown to lower, not raise, system-wide collateral demand, provided there is no significant proliferation of CCPs. Central clearing does, however, have significant distributional consequences for collateral requirements across various types of market participants.

Keywords: Central clearing party, margin, credit default swap, collateral, client clearing

JEL Classification: G20, G28, G15

Suggested Citation

Duffie, Darrell and Scheicher, Martin and Vuillemey, Guillaume, Central Clearing and Collateral Demand (January 31, 2014). Rock Center for Corporate Governance at Stanford University Working Paper No. 171. Available at SSRN: https://ssrn.com/abstract=2388894 or http://dx.doi.org/10.2139/ssrn.2388894

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Martin Scheicher

European Central Bank (ECB) ( email )

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Frankfurt am Main, 60314
Germany
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+49 69 1344 7949 (Fax)

HOME PAGE: http://www.ecb.europa.eu

Guillaume Vuillemey

HEC Paris - Finance Department ( email )

1 rue de la Libération
Paris, Not Applicable 78351
France
+33660204275 (Phone)

HOME PAGE: http://sites.google.com/site/guillaumevuillemey/home

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