Does central clearing affect counterparty risk and liquidity risk in the sovereign CDS market?

39 Pages Posted: 9 Jul 2019 Last revised: 3 Aug 2021

Date Written: August 2, 2021

Abstract

Central counterparty clearing houses (CCPs) are highly regulated intermediaries and risk management providers for OTC transactions. This paper analyzes the impact of CCP clearing on the pricing of sovereign single-name credit default swaps (CDS) using a global sample between 2010 and 2017. The results indicate that a large portion of daily CCP cleared contracts makes CDS spreads insignificant to counterparty risk and thus mitigates a major source of systemic risk in the CDS market. In contrast, CCP clearing has no significant effect on CDS market liquidity. Moreover, CDS spreads are mainly driven by local factors as opposed to global factors.

Keywords: Credit default swaps, central counterparty clearing, sovereign credit risk, counterparty risk, liquidity risks

JEL Classification: G18, G32

Suggested Citation

Molleyres, Josephine and Zimmermann, Heinz, Does central clearing affect counterparty risk and liquidity risk in the sovereign CDS market? (August 2, 2021). Available at SSRN: https://ssrn.com/abstract=3415563 or http://dx.doi.org/10.2139/ssrn.3415563

Josephine Molleyres

Swiss National Bank (SNB) ( email )

Bundesplatz 1
Bern, CH-3001
Switzerland
+41764596419 (Phone)

Heinz Zimmermann (Contact Author)

University of Basel ( email )

Peter Merian Weg 6
Basel, 4002
Switzerland
+41 61 267 33 16 (Phone)
+41 61 267 08 98 (Fax)

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