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The Economics of Central Clearing

Author

Listed:
  • Albert J. Menkveld

    (Finance Department, Vrije Universiteit Amsterdam, 1081 HV Amsterdam, The Netherlands)

  • Guillaume Vuillemey

    (Finance Department, HEC Paris, 78350 Jouy-en-Josas, France)

Abstract

Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007-2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies, which along with classical studies are surveyed in this article. For example, multilateral netting, the insurance against counterparty risk, the effect of CCPs on asset prices and fire sales, margins setting, the default waterfall, and CCP governance are discussed here. We review both CCP theory and empirical work and conclude by discussing regulatory issues.

Suggested Citation

  • Albert J. Menkveld & Guillaume Vuillemey, 2021. "The Economics of Central Clearing," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 153-178, November.
    • Handle: RePEc:anr:refeco:v:13:y:2021:p:153-178
    DOI: 10.1146/annurev-financial-100520-100321
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    Citations

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    Cited by:

    1. Khetan, Umang & Neamțu, Ioana & Sen, Ishita, 2023. "The market for sharing interest rate risk: quantities behind prices," Bank of England working papers 1031, Bank of England.
    2. Vuillemey, Guillaume, 2023. "Mitigating fire sales with a central clearing counterparty," Journal of Financial Intermediation, Elsevier, vol. 55(C).
    3. Ari Kutai & Daniel Nathan & Milena Wittwer, 2024. "Exchanges for government bonds? Evidence during COVID-19," Bank of Israel Working Papers 2024.03, Bank of Israel.
    4. Melinda Friesz & Kira Muratov-Szabó & Andrea Prepuk & Kata Váradi, 2021. "Risk Mutualization in Central Clearing: An Answer to the Cross-Guarantee Phenomenon from the Financial Stability Viewpoint," Risks, MDPI, vol. 9(8), pages 1-19, August.
    5. González-Urteaga, Ana & Rubio, Gonzalo, 2022. "Guarantee requirements by European central counterparties and international volatility spillovers," Research in International Business and Finance, Elsevier, vol. 62(C).
    6. Inaki Aldasoro & Luitgard A M Veraart, 2022. "Systemic Risk in Markets with Multiple Central Counterparties," BIS Working Papers 1052, Bank for International Settlements.
    7. Dorinel Bastide & St'ephane Cr'epey & Samuel Drapeau & Mekonnen Tadese, 2023. "Resolving a Clearing Member's Default, A Radner Equilibrium Approach," Papers 2310.02608, arXiv.org, revised Oct 2024.
    8. Bardoscia, Marco & Caccioli, Fabio & Gao, Haotian, 2022. "Efficiency of central clearing under liquidity stress," Bank of England working papers 1002, Bank of England.
    9. Huang, Wenqian & Zhu, Haoxiang, 2024. "CCP auction design," Journal of Economic Theory, Elsevier, vol. 217(C).
    10. Cristina Di Luigi & Antonio Perrella & Alessio Ruggieri, 2024. "The fundamental role of the repo market and central clearing," Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) 48, Bank of Italy, Directorate General for Markets and Payment System.
    11. Onur, Esen & Reiffen, David & Sharma, Rajiv, 2024. "The impact of margin requirements on voluntary clearing decisions," Journal of Financial Markets, Elsevier, vol. 68(C).
    12. Daisuke Miyakawa & Takemasa Oda & Taihei Sone, 2023. "Regulatory Reforms and Price Heterogeneity in an OTC Derivative Market," Bank of Japan Working Paper Series 23-E-12, Bank of Japan.
    13. Christian Kubitza & Loriana Pelizzon & Mila Getmansky Sherman, 2024. "Loss Sharing in Central Clearinghouses: Winners and Losers," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(2), pages 237-273.
    14. Christine Parlour, 2023. "An Introduction to Web3 with Implications for Financial Services," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2023(3), May.
    15. Grothe, Magdalena & Pancost, N. Aaron & Tompaidis, Stathis, 2023. "Collateral competition: Evidence from central counterparties," Journal of Financial Economics, Elsevier, vol. 149(3), pages 536-556.
    16. Stéphane Crépey, 2022. "Positive XVAs," Post-Print hal-03910135, HAL.
    17. Ron Berndsen, 2021. "Fundamental questions on central counterparties: A review of the literature," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 2009-2022, December.

    More about this item

    Keywords

    central clearing; counterparty risk; margin; default waterfall;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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