The Impact of Margin Requirements on Voluntary Clearing Decisions

44 Pages Posted: 16 Mar 2021 Last revised: 13 Apr 2021

See all articles by Esen Onur

Esen Onur

Commodity Futures Trading Commission (CFTC)

David Reiffen

U.S. Commodity Futures Trading Commission (CFTC)

Rajiv Sharma

U.S. Commodity Futures Trading Commission (CFTC)

Date Written: April 7, 2021

Abstract

We analyze the determinants of financial entities’ choices of whether to voluntarily designate trades for central clearing. In particular, we evaluate the impact of the Uncleared Margin Rule (UMR) on the trading and clearing decisions of firms transacting in the multi-trillion-dollar cash-settled foreign exchange swap markets. The UMR is a multi-jurisdiction rule that requires certain market participants to exchange collateral (margin) for uncleared transactions between themselves. We specifically study the effect of this rule for non-deliverable forwards (NDF) since similar contracts – FX deliverable forwards and swaps - are exempt from the rule in the U.S. and hence constitute a useful control group. In a difference-in-differences setting, we find that compared to FX forwards and swaps, the UMR resulted in firms choosing to clear a higher percentage of their swaps in the NDF market. To understand the forces behind firms’ clearing decisions, we make use of a regulatory data set that includes the identities of the parties to each swap. We show that increased clearing is due almost exclusively to the actions of clearing members, suggesting that the differential cost of clearing for these entities plays a major role in clearing decisions. Consistent with theory, we find the ability to net swap exposure at the central clearing party is one of the drivers behind the decision to clear.

Keywords: Uncleared Margin Rule, CCP, Clearing, NDF

JEL Classification: G18, G15

Suggested Citation

Onur, Esen and Reiffen, David and Sharma, Rajiv, The Impact of Margin Requirements on Voluntary Clearing Decisions (April 7, 2021). Available at SSRN: https://ssrn.com/abstract=3753050 or http://dx.doi.org/10.2139/ssrn.3753050

Esen Onur (Contact Author)

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

David Reiffen

U.S. Commodity Futures Trading Commission (CFTC) ( email )

Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
United States

Rajiv Sharma

U.S. Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

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