Jump to ContentJump to Main Navigation
Show Summary Details
More options …

Statistics & Risk Modeling

with Applications in Finance and Insurance

Editor-in-Chief: Stelzer, Robert

4 Issues per year


Cite Score 2016: 0.33

SCImago Journal Rank (SJR) 2016: 0.346
Source Normalized Impact per Paper (SNIP) 2016: 0.167

Mathematical Citation Quotient (MCQ) 2016: 0.32

Online
ISSN
2196-7040
See all formats and pricing
More options …
Volume 31, Issue 1 (Mar 2014)

Issues

Central clearing of OTC derivatives: Bilateral vs multilateral netting

Rama Cont
  • Corresponding author
  • Department of Mathematics & Institute of Quantititive Finance, Imperial College, London SW8 2AZ, United Kingdom
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Thomas Kokholm
  • Department of Economics and Business, Aarhus University, Fuglesangs Allé 4, 8210 Aarhus, Denmark
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
Published Online: 2014-03-28 | DOI: https://doi.org/10.1515/strm-2013-1161

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.

Keywords: Central clearing; networks; central counterparty; CCP; regulation; collateral; systemic risk; netting; OTC derivatives; OTC markets; risk management

AMS (2010): 91G20; 91G40; 90B15

About the article

Accepted: 2013-12-27

Received: 2013-10-10

Published Online: 2014-03-28

Published in Print: 2014-03-28


Citation Information: Statistics & Risk Modeling, ISSN (Online) 2196-7040, ISSN (Print) 2193-1402, DOI: https://doi.org/10.1515/strm-2013-1161.

Export Citation

©2014 Walter de Gruyter Berlin/Boston. Copyright Clearance Center

Citing Articles

Here you can find all Crossref-listed publications in which this article is cited. If you would like to receive automatic email messages as soon as this article is cited in other publications, simply activate the “Citation Alert” on the top of this page.

[1]
Rama Cont, Darrell Duffie, Paul Glasserman, Chris Rogers, and Fernando Vega-Redondo
Operations Research, 2016, Volume 64, Number 5, Page 1053
[2]
Edina Berlinger, Barbara Dömötör, Ferenc Illés, and Kata Váradi
Közgazdasági Szemle, 2016, Volume 63, Number 9, Page 993
[3]
Yee Cheng Loon and Zhaodong (Ken) Zhong
Journal of Financial Economics, 2016, Volume 119, Number 3, Page 645
[4]
Paul Glasserman, Ciamac C. Moallemi, and Kai Yuan
Operations Research, 2016, Volume 64, Number 5, Page 1143
[5]
Hamed Amini, Damir Filipović, and Andreea Minca
Operations Research, 2016, Volume 64, Number 5, Page 1135
[6]
Rama Cont and Andreea Minca
Annals of Operations Research, 2016, Volume 247, Number 2, Page 523
[7]
Darrell Duffie, Martin Scheicher, and Guillaume Vuillemey
Journal of Financial Economics, 2015, Volume 116, Number 2, Page 237

Comments (0)

Please log in or register to comment.
Log in