IDEAS home Printed from https://ideas.repec.org/a/gam/jjrfmx/v14y2021i12p584-d695146.html
   My bibliography  Save this article

Central Counterparties and Liquidity Provision in Cash Markets

Author

Listed:
  • Thomas Richter

    (ZHAW School of Management and Law, Technoparkstrasse 2, 8400 Winterthur, Switzerland)

Abstract

This paper investigates increased liquidity provision by market makers resulting from their ability to reduce balance sheet encumbrance through the use of central counterparties (CCPs). The introduction of the Basel III leverage rule constitutes a shock to market makers’ balance sheets and thus affects their capacity to intermediate trades. Using trade-by-trade data from sovereign bond markets, we show that liquidity provision by CCP members decreased to a lesser extent following the rule change. We attribute these findings to balance sheet reductions due to the netting enabled by CCPs, thereby highlighting their importance in cash markets.

Suggested Citation

  • Thomas Richter, 2021. "Central Counterparties and Liquidity Provision in Cash Markets," JRFM, MDPI, vol. 14(12), pages 1-26, December.
    • Handle: RePEc:gam:jjrfmx:v:14:y:2021:i:12:p:584-:d:695146
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1911-8074/14/12/584/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1911-8074/14/12/584/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Boissel, Charles & Derrien, François & Ors, Evren & Thesmar, David, 2017. "Systemic risk in clearing houses: Evidence from the European repo market," Journal of Financial Economics, Elsevier, vol. 125(3), pages 511-536.
    2. Loon, Yee Cheng & Zhong, Zhaodong Ken, 2014. "The impact of central clearing on counterparty risk, liquidity, and trading: Evidence from the credit default swap market," Journal of Financial Economics, Elsevier, vol. 112(1), pages 91-115.
    3. Philipp Haene & Andy Sturm, 2009. "Optimal Central Counterparty Risk Management," Working Papers 2009-07, Swiss National Bank.
    4. Bellia, Mario & Girardi, Giulio & Panzica, Roberto & Pelizzon, Loriana & Peltonen, Tuomas, 2024. "The demand for central clearing: To clear or not to clear, that is the question!," Journal of Financial Stability, Elsevier, vol. 72(C).
    5. Adrian, Tobias & Boyarchenko, Nina & Shachar, Or, 2017. "Dealer balance sheets and bond liquidity provision," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 92-109.
    6. Dufour, Alfonso & Marra, Miriam & Sangiorgi, Ivan, 2019. "Determinants of intraday dynamics and collateral selection in centrally cleared and bilateral repos," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    7. Duffie, Darrell, 1996. "Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
    8. Loriano Mancini & Angelo Ranaldo & Jan Wrampelmeyer, 2016. "The Euro Interbank Repo Market," The Review of Financial Studies, Society for Financial Studies, vol. 29(7), pages 1747-1779.
    9. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    10. Foucault, Thierry & Pagano, Marco & Roell, Ailsa, 2013. "Market Liquidity: Theory, Evidence, and Policy," OUP Catalogue, Oxford University Press, number 9780199936243.
    11. Di Maggio, Marco, 2017. "Comment on: “Dealer balance sheets and bond liquidity provision” by Adrian, Boyarchenko and Shachar," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 110-112.
    12. Blum, Jürg M., 2008. "Why 'Basel II' may need a leverage ratio restriction," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1699-1707, August.
    13. O'Hara, Maureen & Alex Zhou, Xing, 2021. "The electronic evolution of corporate bond dealers," Journal of Financial Economics, Elsevier, vol. 140(2), pages 368-390.
    14. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
    15. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, vol. 100(5), pages 1941-1966, December.
    16. Hendrik Bessembinder & Stacey Jacobsen & William Maxwell & Kumar Venkataraman, 2018. "Capital Commitment and Illiquidity in Corporate Bonds," Journal of Finance, American Finance Association, vol. 73(4), pages 1615-1661, August.
    17. Michael J. Fleming & Frank M. Keane, 2021. "The Netting Efficiencies of Marketwide Central Clearing," Staff Reports 964, Federal Reserve Bank of New York.
    18. Smith, Jonathan Acosta & Grill, Michael & Lang, Jan Hannes, 2017. "The leverage ratio, risk-taking and bank stability," Working Paper Series 2079, European Central Bank.
    19. Tobias Adrian & Nina Boyarchenko & Or Shachar, 2017. "Dealer Balance Sheets and Corporate Bond Liquidity Provision," Liberty Street Economics 20170524, Federal Reserve Bank of New York.
    20. Gang Hu & R. David McLean & Jeffrey Pontiff & Qinghai Wang, 2014. "The Year-End Trading Activities of Institutional Investors: Evidence from Daily Trades," The Review of Financial Studies, Society for Financial Studies, vol. 27(5), pages 1593-1614.
    21. Per Östberg & Thomas Richter, 2017. "The Sovereign Debt Crisis: Rebalancing or Freezes?," Swiss Finance Institute Research Paper Series 17-32, Swiss Finance Institute.
    22. Cont Rama & Kokholm Thomas, 2014. "Central clearing of OTC derivatives: Bilateral vs multilateral netting," Statistics & Risk Modeling, De Gruyter, vol. 31(1), pages 3-22, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ranaldo, Angelo & Schaffner, Patrick & Vasios, Michalis, 2021. "Regulatory effects on short-term interest rates," Journal of Financial Economics, Elsevier, vol. 141(2), pages 750-770.
    2. van Horen, Neeltje & Kotidis, Antonios, 2018. "Repo market functioning: The role of capital regulation," CEPR Discussion Papers 13090, C.E.P.R. Discussion Papers.
    3. 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.
    4. Bicu-Lieb, Andreea & Chen, Louisa & Elliott, David, 2020. "The leverage ratio and liquidity in the gilt and gilt repo markets," Journal of Financial Markets, Elsevier, vol. 48(C).
    5. Goldstein, Michael A. & Namin, Elmira Shekari, 2023. "Corporate bond liquidity and yield spreads: A review," Research in International Business and Finance, Elsevier, vol. 65(C).
    6. O'Hara, Maureen & Zhou, Xing (Alex), 2021. "Anatomy of a liquidity crisis: Corporate bonds in the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 142(1), pages 46-68.
    7. Bilan, Andrada & Gündüz, Yalın, 2022. "CDS market structure and bond spreads," Discussion Papers 24/2022, Deutsche Bundesbank.
    8. Haselmann, Rainer & Kick, Thomas & Singla, Shikhar & Vig, Vikrant, 2022. "Capital regulation, market-making, and liquidity," LawFin Working Paper Series 44, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    9. Hugues Dastarac, 2020. "Market Making and Proprietary Trading in the US Corporate Bond Market," Working papers 754, Banque de France.
    10. Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    11. Harald Hau & Peter Hoffmann & Sam Langfield & Yannick Timmer, 2021. "Discriminatory Pricing of Over-the-Counter Derivatives," Management Science, INFORMS, vol. 67(11), pages 6660-6677, November.
    12. Alexander Bechtel & Angelo Ranaldo & Jan Wrampelmeyer, 2023. "Liquidity Risk and Funding Cost," Review of Finance, European Finance Association, vol. 27(2), pages 399-422.
    13. Moinas, Sophie & Nguyen, Minh & Valente, Giorgio, 2017. "Funding Constraints and Market Illiquidity in the European Treasury Bond Market," TSE Working Papers 17-814, Toulouse School of Economics (TSE).
    14. Coen, Patrick & Coen, Jamie, 2019. "A structural model of interbank network formation and contagion," Bank of England working papers 833, Bank of England.
    15. Helwege, Jean & Wang, Liying, 2021. "Liquidity and price pressure in the corporate bond market: evidence from mega-bonds," Journal of Financial Intermediation, Elsevier, vol. 48(C).
    16. Scheicher, Martin, 2023. "Intermediation in US and EU bond and swap markets: stylised facts, trends and impact of the coronavirus (COVID-19) crisis in March 2020," ESRB Occasional Paper Series 24, European Systemic Risk Board.
    17. Benedikt Ballensiefen & Angelo Ranaldo, 2023. "Safe Asset Carry Trade," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 13(2), pages 223-265.
    18. Breckenfelder, Johannes & Ivashina, Victoria, 2021. "Bank balance sheet constraints and bond liquidity," Working Paper Series 2589, European Central Bank.
    19. Corradin, Stefano & Heider, Florian & Hoerova, Marie, 2017. "On collateral: implications for financial stability and monetary policy," Working Paper Series 2107, European Central Bank.
    20. Gino Cenedese & Pasquale Della Corte & Tianyu Wang, 2021. "Currency Mispricing and Dealer Balance Sheets," Journal of Finance, American Finance Association, vol. 76(6), pages 2763-2803, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jjrfmx:v:14:y:2021:i:12:p:584-:d:695146. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.