Meet Me in the Middle – Central Clearing and Netting Efficiency in the Credit Default Swap Market

52 Pages Posted: 15 Apr 2020

See all articles by Gregor Schoenemann

Gregor Schoenemann

University of Hohenheim

Monika Gehde-Trapp

University of Mannheim - Finance Area

Date Written: March 25, 2020

Abstract

We study the effect of central clearing on netting efficiency in the CDS market. We examine the development of position data and netting efficiency using aggregate data from the Depository Trust and Clearing Corporation (DTCC). Our main finding is that gross outstanding positions in cleared contracts increase, whereas net outstanding positions increase only at a marginally significant level. Hence, central clearing decreases netting efficiency to a considerable extent. Furthermore, we analyze different quintile portfolios of CDS contracts according to pre-clearing netting efficiency. We find that only those contracts that were most efficiently netted bilaterally, decrease in netting efficiency after the introduction of central clearing. The negative effect of central clearing on netting efficiency is more pronounced for the first contracts that have been made clearing eligible.

Keywords: Central clearing, credit default swaps, netting efficiency, counterparty risk

JEL Classification: G12, G15, G18, G23, G28

Suggested Citation

Schoenemann, Gregor and Gehde-Trapp, Monika, Meet Me in the Middle – Central Clearing and Netting Efficiency in the Credit Default Swap Market (March 25, 2020). Available at SSRN: https://ssrn.com/abstract=3560957 or http://dx.doi.org/10.2139/ssrn.3560957

Gregor Schoenemann (Contact Author)

University of Hohenheim ( email )

Fruwirthstr. 48
Stuttgart, 70599
Germany

Monika Gehde-Trapp

University of Mannheim - Finance Area ( email )

L9, 1-2
Mannheim, 68131
Germany
++496211811561 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
45
Abstract Views
327
PlumX Metrics