The Impact of the Leverage Ratio on Client Clearing

39 Pages Posted: 25 Jun 2018

Date Written: June 15, 2018

Abstract

As part of the post-crisis regulatory reform, many interest-rate derivative transactions are required to be centrally cleared. Nevertheless, the treatment of this type of transaction under the leverage ratio (LR) requirement does not allow for the use of initial margin to reduce the exposure, thereby increasing capital costs. As a result, LR affected clearing member banks may be more reluctant to provide central clearing services to clients given this additional cost. This in turn can prevent some real economy firms from hedging their risks. We analyse whether this is the case by exploiting detailed confidential transaction and portfolio level data as well as the introduction and posterior tightening of the LR in the UK in a diff-in-diff framework. Our results suggest that the LR had a disincentivising effect on client clearing, both in terms of daily transactions as well as the number of clients, but this impact seems to be driven by a reduced willingness to take on new clients.

Keywords: Financial regulation, leverage ratio, interest rate derivatives, clearing, banking

JEL Classification: G01, G18, G20, G28

Suggested Citation

Ferrara, Gerardo and Acosta Smith, Jonathan and Rodriguez Tous, Francesc, The Impact of the Leverage Ratio on Client Clearing (June 15, 2018). Bank of England Working Paper No. 735, Available at SSRN: https://ssrn.com/abstract=3200353 or http://dx.doi.org/10.2139/ssrn.3200353

Gerardo Ferrara (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jonathan Acosta Smith

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Francesc Rodriguez Tous

Bayes Business School ( email )

106 Bunhill Row
106 Bunhill Row
London, EC1Y 8TZ

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