Clearing networks

Galbiati, Marco; Soramäki, Kimmo

doi:10.1016/j.jebo.2012.05.013

Cited by 24 publications

(24 citation statements)

References 12 publications

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“…They examine both homogeneous (Erdős-Rényi) and core-periphery networks, and find that homogeneous networks are more resilient. Jackson and Manning (2007) and Galbiati and Soramäki (2012) use different approaches to examine the desirability of tiering -that is, restricting direct access to the CCP to a limited set of counterparties. Song, Sowers, and Jones (2014) extend the Galbiati and Soramäki framework to study the effect of network structure on the maximum exposure risk of the CCP itself, and use extreme value theory to obtain analytical results.…”

Section: A Review Of the Relevant Literaturementioning

confidence: 99%

Centralized netting in financial networks

Garratt

Zimmerman

2020

Journal of Banking & Finance

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We consider how the introduction of centralized netting in financial networks affects total netted exposures between counterparties. In some cases there is a trade-off: centralized netting increases the expectation of net exposures, but reduces the variance. We show that the set of networks for which expected net exposures decreases is a strict subset of those for which the variance decreases, so the trade-off can only be in one direction. For some network structures, introducing centralized netting is never beneficial to dealers unless sufficient weight is placed on reductions in variance.This may explain why, in the absence of regulation, traders in a derivatives network do not develop central clearing. Our results can be used to estimate margin requirements and counterparty risk in financial networks.

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Section: A Review Of the Relevant Literaturementioning

confidence: 99%

Centralized netting in financial networks

Garratt

Zimmerman

2020

Journal of Banking & Finance

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“…The authors argue there is incentive for a "tiered" structure. Galbiati and Soramäki (2012) analyze the implications of "tiering" in terms of network topology. In view of relevant network topologies, they examine the tree structure, while more general structures matter in our liquidity context.…”

Section: Relevant Literature and Contributionsmentioning

confidence: 99%

Does a central clearing counterparty reduce liquidity needs?

Hayakawa

2017

J Econ Interact Coord

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This study investigates whether and how central clearing influences the overall liquidity needs in a network of financial obligations. Utilizing the approach of flow network theory, we show that the effect of adding a central clearing counterparty (CCP) is decomposed into two effects: central routing, and central netting effects. Each effect can produce different liquidity needs according to different liquidity scenarios. The analysis indicates that adding a CCP in times of financial distress successfully reduces the overall liquidity needs if and only if the netting efficiency of the CCP is sufficiently high. Furthermore, once the economy is no longer in financial distress, higher netting efficiency of the CCP could conversely increase the overall liquidity needs. The results have implications for the effectiveness of CCPs in mitigating systemic risk in times of financial distress, and their operating costs once the distress has passed.

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“…They examine both homogeneous (Erdős-Rényi) and core-periphery networks, and find that homogeneous networks are more resilient. Jackson and Manning (2007) and Galbiati and Soramäki (2012) use different approaches to examine the desirability of tiering -that is, restricting direct access to the CCP to a limited set of counterparties. Jackson and Manning examine the impact using a range of metrics, while Galbiati and Soramäki focus on the impact on exposures measured as averages over time, or across direct counterparties, in terms of a single asset class.…”

Section: Other Articles On Network Models Of Ccpsmentioning

confidence: 99%

Does Central Clearing Reduce Counterparty Risk in Realistic Financial Networks?

Garratt

Zimmerman

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractNovating a single asset class to a central counterparty (CCP) in an over-the-counter derivatives trading network impacts both the mean and variance of total net exposures between counterparties. When a small number of dealers trade in a relatively large number of asset classes, central clearing increases the mean and variance of net exposures, which may lead to increased counterparty risk and higher margin needs. There are intermediate cases where there is a tradeoff: The introduction of a CCP leads to an increase in expected net exposures but this increase is accompanied by a reduction in variance. We extend the work of Duffie and Zhu (2011) by considering general classes of network structures and focus on scale-free and core-periphery structures, which have been shown to be accurate models of real-world financial networks. We find that a CCP is unlikely to be beneficial when the link structure of the network relies on just a few key nodes. In particular, in large scale-free networks a CCP will always worsen expected netting efficiency. In such cases, CCPs can improve netting efficiency only if agents have some degree of risk aversion that allows them to trade off the reduced variance against the higher expected netted exposures. This may explain why, in the absence of regulation, traders in a derivatives network may not develop a CCP themselves.

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Clearing networks

Cited by 24 publications

References 12 publications

Centralized netting in financial networks

Centralized netting in financial networks

Does a central clearing counterparty reduce liquidity needs?

Does Central Clearing Reduce Counterparty Risk in Realistic Financial Networks?

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