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

57 Pages Posted: 2 Feb 2018 Last revised: 8 Jun 2019

See all articles by Mario Bellia

Mario Bellia

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

Giulio Girardi

Securities and Exchange Commission

Roberto Panzica

European Union - European Commission, Joint Research Centre

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 06, 2019

Abstract

This paper is a first attempt at empirically analyzing whether post-crisis regulatory reforms have created appropriate incentives to voluntarily centrally clear Over-The-Counter (OTC) derivative contracts. We use confidential European trade repository data on singlename 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 clearing incentives seem particularly responsive to seller’s credit risk, in line with the notion that counterparty credit risk is asymmetric in CDS contracts. 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. Lastly, we find evidence that when the transaction helps netting positions with the CCP, and hence lower margins, the likelihood to clear is higher.

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 Girardi, Giulio 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 06, 2019). 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/

Giulio Girardi

Securities and Exchange Commission ( email )

Washington, DC
United States

Roberto Panzica

European Union - European Commission, Joint Research Centre ( email )

Via E. Fermi 2749
Ispra (VA), I-21027
Italy
93100 (Fax)

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

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