Adverse Selection Effect of CCP Haircuts

70 Pages Posted: 9 Feb 2023 Last revised: 29 Mar 2025

See all articles by Dmitry Chebotarev

Dmitry Chebotarev

Indiana University - Kelley School of Business - Department of Finance

Date Written: December 18, 2022

Abstract

Centralized clearing is becoming widespread, making Central Counterparties (CCPs) systemically important. Using a novel transaction-level dataset of centrally cleared and over-the-counter (OTC) repo, I show that high CCP haircuts drive low-risk borrowers away from the centrally cleared to the OTC market. This happens because an increase in CCP haircuts applies to all participants uniformly, but safer borrowers are likelier to switch to borrowing OTC. This effect is stronger among collateral-constrained borrowers. While conventional wisdom holds that high haircuts enhance CCP stability, I demonstrate that they can induce adverse selection in the CCP market, potentially undermining this stability instead.

Keywords: CCP, Central Counterparties, OTC, Haircut, Collateral Requirements, Repo

JEL Classification: G21, G23, G28, G32

Suggested Citation

Chebotarev, Dmitry, Adverse Selection Effect of CCP Haircuts (December 18, 2022). Available at SSRN: https://ssrn.com/abstract=4350984 or http://dx.doi.org/10.2139/ssrn.4350984

Dmitry Chebotarev (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

HOME PAGE: http://https://dchebotarev.com/

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

Paper statistics

Downloads
147
Abstract Views
752
Rank
424,497
PlumX Metrics