The Demand for Central Clearing: To Clear or Not to Clear, That Is the Question

56 Pages Posted: 2 Feb 2018 Last revised: 16 Apr 2019

See all articles by Mario Bellia

Mario Bellia

European Commission Joint Research Center - JRC-Ispra, European Commision; Goethe University Frankfurt - Research Center SAFE

Roberto Panzica

Goethe University Frankfurt - Research Center SAFE

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Tuomas A. Peltonen

European Central Bank (ECB)

Date Written: June 15, 2018

Abstract

This paper is a first attempt at empirically analyzing whether post-crisis regulatory reforms developed by global-standard-setting bodies have created appropriate incentives to centrally clear Over-The-Counter (OTC) derivative contracts. We analyze three main drivers of the decision to clear: 1) the credit risk of the counterparty; 2) the characteristics of the contract; 3) the clearing member’s net exposure vis-a-vis the Central Counterparty Clearing House (CCP). We use confidential European trade repository data on single-name sovereign Credit Derivative Swap (CDS) transactions, and show that both the seller and the buyer manage counterparty’s exposures and capital costs, strategically choosing to clear when the counterparty is riskier. The riskiness of the underlying reference entity also enters the decision to clear as it affects both Counterparty Credit Risk (CCR) capital charges for OTC contracts and CCP margins for cleared contracts. We empirically investigate the trade-off between the two and find that the likelihood to clear is higher if the reference entity becomes more risky, but only for the riskier sovereign CDS in the sample, while for safer sovereign CDS the opposite is true. Our findings suggest that CCP margin savings considerations may be the main force behind the decision to clear for safer instruments while CCR exposures and capital charges may prevail for riskier ones. Lastly, we find some evidence that when the transaction helps reducing counterparty’s overall outstanding positions (and therefore margins) vis-a-vis the CCP, the likelihood to clear is higher. This result holds true as long as considerations such as CCR counterparty risk and wrong-way risk do not prevail.

Keywords: Credit Default Swap (CDS), Central Counterparty Clearing House (CCP), European Market Infrastructure Regulation (EMIR), Sovereign

JEL Classification: G18, G28, G32

Suggested Citation

Bellia, Mario and Panzica, Roberto and Pelizzon, Loriana and Peltonen, Tuomas A., The Demand for Central Clearing: To Clear or Not to Clear, That Is the Question (June 15, 2018). SAFE Working Paper No. 193. Available at SSRN: https://ssrn.com/abstract=3116261 or http://dx.doi.org/10.2139/ssrn.3116261

Mario Bellia

European Commission Joint Research Center - JRC-Ispra, European Commision ( email )

Via Enrico Fermi 2749, Ispra, VA
Ispra (VA), 21027
Italy

Goethe University Frankfurt - Research Center SAFE ( email )

Frankfurt am Main
Germany

HOME PAGE: http://safe-frankfurt.de/

Roberto Panzica

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
130
rank
213,227
Abstract Views
690
PlumX Metrics