Central Clearing and Collateral Demand

39 Pages Posted: 11 Feb 2014 Last revised: 8 May 2021

See all articles by Darrell Duffie

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: February 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.

Suggested Citation

Duffie, James Darrell and Scheicher, Martin and Vuillemey, Guillaume, Central Clearing and Collateral Demand (February 2014). NBER Working Paper No. w19890, Available at SSRN: https://ssrn.com/abstract=2393622

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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Guillaume Vuillemey

HEC Paris - Finance Department ( email )

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Paris, Not Applicable 78351
France
+33660204275 (Phone)

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

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