The Cost of Clearing Fragmentation

47 Pages Posted: 13 Dec 2019

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

European Securities and Markets Authority

Multiple version iconThere are 2 versions of this paper

Date Written: December 11, 2019

Abstract

Fragmenting clearing across multiple central counterparties (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 U.S. dollar swap contracts cleared both at the Chicago Mercantile Exchange (CME) and the LCH in London and provide evidence consistent with a collateral cost explanation of this basis.

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 (December 11, 2019). BIS Working Paper No. 826, Available at SSRN: https://ssrn.com/abstract=3502465

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

European Securities and Markets Authority ( email )

103 Rue de Grenelle
Paris, 75007
France

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