The Cost of Clearing Fragmentation
47 Pages Posted: 13 Dec 2019
Date Written: December 11, 2019
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: Suggested Citation