The Cost of Clearing Fragmentation

40 Pages Posted: 1 Jun 2019 Last revised: 4 Nov 2020

See all articles by Evangelos Benos

Evangelos Benos

Bank of England

Wenqian Huang

Bank for International Settlements

Albert J. Menkveld

Vrije Universiteit Amsterdam; Tinbergen Institute

Michalis Vasios

Norges Bank Investment Management (NBIM)

Multiple version iconThere are 2 versions of this paper

Date Written: November 4, 2020

Abstract

Fragmenting clearing across multiple central counterparties (CCPs) is costly because global dealers cannot net positions across CCPs. They have to collateralize both the short position in one CCP and an offsetting long position in another CCP. This observation coupled with a structural net order imbalance across CCPs can cause prices to persistently differ across them (“the CCP basis”). We propose a model to rationalize this basis and derive several hypotheses. Testing these on unique CCP data for interest-rate derivatives, yields broad empirical support for the model and suggests that the clearing friction costs LCH sellers $80 million daily.

Keywords: central clearing, CCP basis, collateral, fragmentation

JEL Classification: G10, G12, G14

Suggested Citation

Benos, Evangelos and Huang, Wenqian and Menkveld, Albert J. and Vasios, Michalis, The Cost of Clearing Fragmentation (November 4, 2020). Available at SSRN: https://ssrn.com/abstract=3397065 or http://dx.doi.org/10.2139/ssrn.3397065

Evangelos Benos (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Wenqian Huang

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://wenqianhuang.org

Albert J. Menkveld

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Michalis Vasios

Norges Bank Investment Management (NBIM) ( email )

Queensberry House
3 Old Burlington Street
London, W1S 3AE
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
42
Abstract Views
449
PlumX Metrics