Loss Sharing in Central Clearinghouses: Winners and Losers

56 Pages Posted: 6 Nov 2018 Last revised: 23 Apr 2021

See all articles by Christian Kubitza

Christian Kubitza

University of Bonn - Institute for Financial Economics and Statistics

Loriana Pelizzon

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

Mila Getmansky Sherman

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

Date Written: April 23, 2021

Abstract

Central clearing counterparties (CCPs) were created to reduce default losses for market partic- ipants in derivatives markets. We show that not all market participants benefit, and some are worse off. Loss sharing rules and their interaction with market network structure affect who are winners and losers. The loss sharing rule most widely used by CCPs is based on net risk. We develop a simple model which shows that this rule largely benefits market participants with flat portfolios but not participants with directional portfolios or those located in the periphery of the network. This result is consistent with the reluctance of peripheral participants to voluntarily clear in practice. We investigate how to offset cross-sectional differences in loss sharing benefits, and highlight alternative loss sharing rules and centralized trading as potential remedies.

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 (April 23, 2021). SAFE Working Paper No. 235, Available at SSRN: https://ssrn.com/abstract=3278582 or http://dx.doi.org/10.2139/ssrn.3278582

Christian Kubitza

University of Bonn - Institute for Financial Economics and Statistics ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
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

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 ( email )

Dorsoduro 3246
Venice, Veneto 30123
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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
149
Abstract Views
1,354
rank
234,289
PlumX Metrics