The Cost of Clearing Fragmentation
40 Pages Posted: 1 Jun 2019 Last revised: 24 Nov 2019
Date Written: May 31, 2019
Fragmenting clearing across multiple central counter-parties (CCPs) is costly. This is because dealers providing liquidity globally, cannot net trades cleared in different CCPs and this increases their collateral costs. These costs are then passed on to their clients through price distortions which take the form of a price differential (basis) when the same products are cleared in different CCPs. Using proprietary data, we document an economically significant CCP basis for dollar swap contracts cleared both at the Chicago Mercantile Exchange (CME) and the London Clearing House (LCH) and provide empirical evidence consistent with a collateral cost explanation of this basis.
Keywords: central clearing, CCP basis, collateral, fragmentation
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation