Central clearing of OTC derivatives: Bilateral vs multilateral netting

By Rama Cont, Thomas Kokholm. 2013

133 citations recorded by the source corpus.

Abstract We study the impact of central clearing of over-the-counter (OTC) transactions on counterparty exposures in a market with OTC transactions across several asset classes with heterogeneous characteristics. The impact of introducing a central counterparty (CCP) on expected interdealer exposure is determined by the tradeoff between multilateral netting across dealers on one hand and bilateral netting across asset classes on the other hand. We find this tradeoff to be sensitive to assumptions on heterogeneity of asset classes in terms of `riskyness' of the asset class as well as correlation of exposures across asset classes. In particular, while an analysis assuming independent, homogeneous exposures suggests that central clearing is efficient only if one has an unrealistically high number of participants, the opposite conclusion is reached if differences in riskyness and correlation across asset classes are realistically taken into account. We argue that empirically plausible specifications of model parameters lead to the conclusion that central clearing does reduce interdealer exposures: the gain from multilateral netting in a CCP overweighs the loss of netting across asset classes in bilateral netting agreements. When a CCP exists for interest rate derivatives, adding a CCP for credit derivatives is shown to decrease overall exposures. These findings are shown to be robust to the statistical assumptions of the model as well as the choice of risk measure used to quantify exposures.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/cc4e76cbb7e564b20b2093fd09b8c8cf3312bbea

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Finance

Citations in the corpus

Counterparty Risk and Funding: A Tale of Two Puzzles (2014, background): “…also poses a severe liquidity constraint on the market, as well as serious systemic and concentration risk issues (see Duffie (2010), Cont and Kokholm (2012), Cont, Mondescu, and Yu (2011), Cont, Santos, and Moussa (2013), Singh and Aitken (2009), Singh (2010), Levels and Capel…”
Central Clearing and Collateral Demand (2015, unknown): “Their work has been extended by Cont and Kokholm (2012), who focus on assets that are heterogeneous with respect to their risk characteristics, and by Anderson et al. (2013), who analyse netting efficiency with linked and unlinked CCP configurations.”
Credit Default Swaps: A Survey (2014, background): “A rather different country-specific channel is suggested by Cosset and Jeanneret [2013], who propose that governments that are more efficient at collecting tax revenues are less likely to default and face lower borrowing costs, as reflected in sovereign CDS spreads. In another study, Lee et al. [201”