Clearinghouse-Five: Determinants of Voluntary Clearing in European Derivatives Markets

Abstract

Central clearing is a major part of the policy response to the financial crisis of 2008, aiming to reign in counterparty credit risk in derivatives markets. I perform an empirical study of the incentives for voluntary central clearing of OTC derivative contracts in Europe. Central clearing acts as insurance against counterparty credit risk related to derivative contracts, and is legally mandated for a specific subset of standardized derivative contracts, with a significant portion of the other contracts eligible for voluntary clearing. I show that there exist significant economies of scale in central clearing, in terms of both the size of each contract, and the scale of total clearing activity. I also show that maturity of the contract and international frictions affect voluntary clearing of different types of derivative contracts in different ways, linked to the conventional maturity and payout structures of various types of contracts. Finally, I show that significant amount of clearing happens only for credit and interest rate derivatives, while equity, foreign exchange, and commodity derivatives are rarely centrally cleared. The results validate theoretical literature, and guide future modeling of derivative markets.

Securitisation special purpose entities, bank sponsors and derivatives

“…Their analysis shows that while these markets are mainly dominated by big derivative dealers, non-bank financial institutions are active players across the various asset classes of derivatives. While a number of empirical questions have been examined using the EMIR data (Aldasoro and Barth, 2017;D'Errico and Roukny, 2017;Hau et al, 2017;Bellia et al, 2017;Fiedor et al, 2018;Fiedor, 2018), we are aware of only one paper which has examined the role of SPEs in derivative markets using the EMIR data. The findings of Kenny et al (2016) confirm that these vehicles are net sellers of CDS and have linkages to non-domestic banks.…”