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

SAFE Working Paper No. 193

67 Pages Posted: 2 Feb 2018 Last revised: 24 Jan 2023

See all articles by Mario Bellia

Mario Bellia

European Union - JRC-Ispra, European Commision

Giulio Girardi

Securities and Exchange Commission

Roberto Panzica

Joint Research Center of the European Commission

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Tuomas A. Peltonen

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2022

Abstract

This paper empirically analyses whether post-global financial crisis regulatory reforms have created appropriate incentives to voluntarily centrally clear the over-the-counter (OTC) derivative contracts. We use confidential European trade repository data on single-name sovereign credit default swap (CDS) transactions and show that both the seller and the buyer manage counterparty exposures and capital costs, strategically choosing to clear when the counterparty is riskier. The clearing incentives seem particularly responsive to seller credit risk, which is in line with the notion that counterparty credit risk (CCR) is asymmetric in CDS contracts. The riskiness of the underlying reference entity also enters the decision to clear as it affects both CCR capital charges for OTC contracts and central counterparty clearing house (CCP) margins for cleared contracts. Lastly, we find evidence that when a transaction helps netting positions with the CCP and hence lower margins, the likelihood of clearing is higher.

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

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! (December 1, 2022). 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 Union - JRC-Ispra, European Commision ( email )

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

Giulio Girardi

Securities and Exchange Commission ( email )

Washington, DC
United States

Roberto Panzica

Joint Research Center of the European Commission ( 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

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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