Loss Sharing in Central Clearinghouses: Winners and Losers

102 Pages Posted: 6 Nov 2018 Last revised: 30 Oct 2023

See all articles by Christian Kubitza

Christian Kubitza

European Central Bank, Financial Research Division

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance

Date Written: October 25, 2023

Abstract

Central clearing counterparties (CCPs) were established to mitigate default losses resulting from counterparty risk in derivatives markets. In a parsimonious model, we show that clearing benefits are distributed unevenly across market participants. Loss sharing rules determine who wins or loses from clearing. Current rules disproportionately benefit market participants with flat portfolios. Instead, those with directional portfolios are relatively worse off, consis-tent with their reluctance to voluntarily use central clearing. Alternative loss sharing rules can address cross-sectional disparities in clearing benefits. However, we show that CCPs may fa-vor current rules to maximize fee income, with externalities on clearing participation.

Keywords: Central Clearing, Counterparty Risk, Loss Sharing, OTC markets, Derivatives

JEL Classification: G18, G23, G28, G12

Suggested Citation

Kubitza, Christian and Pelizzon, Loriana and Getmansky Sherman, Mila, Loss Sharing in Central Clearinghouses: Winners and Losers (October 25, 2023). SAFE Working Paper No. 235, Available at SSRN: https://ssrn.com/abstract=3278582 or http://dx.doi.org/10.2139/ssrn.3278582

Christian Kubitza

European Central Bank, Financial Research Division ( email )

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

Leibniz Institute for Financial Research SAFE ( email )

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

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

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance ( email )

Amherst, MA 01003-4910
United States

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