Regulating Clearing in Networks

53 Pages Posted: 16 Sep 2024

See all articles by Pablo D'Erasmo

Pablo D'Erasmo

Federal Reserve Bank of Philadelphia - Research Department

Selman Erol

Carnegie Mellon University - David A. Tepper School of Business

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: August 16, 2024

Abstract

Recent U.S. and European regulations promote centrally clearing derivatives to reduce complexity and systemic risk in the financial system. With a network model, we show that their effectiveness depends on clearing patterns. More clearing does not guarantee less systemic risk. Systemic risk can increase if multilateral netting increases at the expense of bilateral netting. We study confidential derivatives regulatory data and find evidence that contagion is less likely to start in the core but more likely to spread from the core. We introduce concepts of complexity and centrality within the financial network, exploring their implications for stability and regulatory oversight.

Keywords: Central Clearing, Systemic Risk, Interbank Networks, Central Counterparty (CCP), Over-the-Counter Trading (OTC) JEL Classifications: G20, E50, L14

Suggested Citation

D'Erasmo, Pablo and Erol, Selman and Ordoñez, Guillermo, Regulating Clearing in Networks (August 16, 2024). Available at SSRN: https://ssrn.com/abstract=4927929 or http://dx.doi.org/10.2139/ssrn.4927929

Pablo D'Erasmo

Federal Reserve Bank of Philadelphia - Research Department ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Selman Erol (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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