To Be or Not to Be? The Questionable Benefits of Mutual Clearing Agreements for Derivatives

62 Pages Posted: 25 Aug 2020 Last revised: 28 Aug 2020

See all articles by Magdalena Tywoniuk

Magdalena Tywoniuk

Swiss Finance Institute, Students; University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute, Students

Date Written: April 1, 2020

Abstract

Recently, for standard asset classes, the first mutual clearing agreements between Central Coun- terparties (CCPs) have come into existence. There are already global concerns over the unique threats and benefits which arise from these situations, and further concern for an extension of agree- ments to derivatives CCPs. This paper applies the current mutual agreement framework to credit default swaps (derivatives) CCPs and compares this to clearing without any such agreement. Key results concern: The magnitude of price dispersion between multiple CCPs (as trading moves asset prices away from fundamental value), the magnitude of default contagion, the price impact of pre- dation, and the disciplinary mechanism inherent in the mutual cross-margin fund (between CCPs). Current regulatory debate, concerning the safety of permitting use of the default fund to meet inter-CCP shortfalls, is settled. Finally, a large-scale dynamic simulation models the price process – through variation margin exchange – and provides real-world policy/regulatory implications for a variety of market liquidity states.

Keywords: Mutual Agreement, Price Dispersion, Systemic Risk, CDS, Liquidation, Predation, Price Impact, Contagion, Financial Network, Over the Counter Markets

JEL Classification: G00, G01, G02, G14, G10, G18, G20, G23, G33

Suggested Citation

Tywoniuk, Magdalena, To Be or Not to Be? The Questionable Benefits of Mutual Clearing Agreements for Derivatives (April 1, 2020). Swiss Finance Institute Research Paper No. 20-72, Available at SSRN: https://ssrn.com/abstract=3601391 or http://dx.doi.org/10.2139/ssrn.3601391

Magdalena Tywoniuk (Contact Author)

Swiss Finance Institute, Students ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

HOME PAGE: http://https://pasdedanseuse.wixsite.com/magdalenatywoniuk

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

Geneva, Geneva
Switzerland

HOME PAGE: http://https://pasdedanseuse.wixsite.com/magdalenatywoniuk

Swiss Finance Institute, Students ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

HOME PAGE: http://https://pasdedanseuse.wixsite.com/magdalenatywoniuk

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