Central Clearing and Collateral Demand
We use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations. We decompose collateral demand for both customers and dealers into several key components, including the "velocity drag" associated with variation margin movements. We demonstrate the impact on collateral demand of more widespread initial margin requirements, increased novation of CDS to central clearing parties (CCPs), an increase in the number of clearing members, the proliferation of CCPs of both specialized and non-specialized types, and client clearing. Among other results, we show that system-wide collateral demand is increased significantly by the application of initial margin requirements for dealers, whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements, however, mandatory central clearing is shown to lower, not raise, system-wide collateral demand, provided there is no significant proliferation of CCPs. Central clearing does, however, have significant distributional consequences for collateral requirements across various types of market participants.
The views presented in the paper are those of the authors only and do not necessarily represent the views of the European Systemic Risk Board (ESRB), the European Central Bank, the Banque de France, the Eurosystem, or the National Bureau of Economic Research. The authors thank the DTCC for providing the CDS data used in the analysis for the ESRB. They thank Laurent Clerc and the members of the ESRB Expert Group on interconnectedness for providing comments.
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Econometrica, 1990 to present.
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Advances in Mathematical Economics, 1998 to present.
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AEJ: Microeconomics, 2007 to present.
International Journal of Central Banking, 2009 to present.
Stochastic Systems, 2009 to present.
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American Academy of Arts and Sciences, Fellow.
Econometric Society, Fellow and Member of Council.
National Bureau of Economic Research, Research Associate.
NCCR FinRisk, International Scientific Council, Switzerland.
American Finance Association, Board of Directors.
Chicago Mercantile Exchange-Mathematical Sciences Research Institute, Prize Committee.
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Pacific Institute of Mathematical Sciences, Board of Directors.
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Hausdorff Research Institute for Mathematics, University of Bonn, Stochastic Dynamics in Economics and Finance, Advisory Board.
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Lehman Estate (New York), Consulting and Expert Witness.
Matterhorn Investment Management (hedge fund), Consultation.
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Cantor Fitzgerald (interdealer brokerage), Expert Witness.
Moody's Corporation, Board of Directors.
Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256. citation courtesy of