Search Results
Report
Does central clearing reduce counterparty risk in realistic financial networks?
Novating a single asset class to a central counterparty (CCP) in an over-the-counter derivatives trading network impacts both the mean and variance of total net exposures between counterparties. When a small number of dealers trade in a relatively large number of asset classes, central clearing increases the mean and variance of net exposures, which may lead to increased counterparty risk and higher margin needs. There are intermediate cases where there is a trade-off: The introduction of a CCP leads to an increase in expected net exposures but this increase is accompanied by a reduction in ...
Working Paper
Balance-Sheet Netting in U.S. Treasury Markets and Central Clearing
In this paper, we provide a comprehensive investigation of the potential for expanded central clearing to reduce the costs of the supplementary leverage ratio (SLR) on Treasury market intermediation in both cash and repo markets. Combining a detailed analysis of the rules involved in calculating the SLR with a unique set of regulatory data, we conclude that expanding central clearing would have relatively limited effects on the level of SLRs. We do find intermediaries’ increase their balance sheet netting when their regulatory balance sheet costs are higher. Our data permits us to ...
Working Paper
Counterparty Risk and Counterparty Choice in the Credit Default Swap Market
We investigate how market participants price and manage counterparty risk in the post-crisis period using confidential trade repository data on single-name credit default swap (CDS) transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts, but a large impact on the choice of counterparties. We show that market participants are significantly less likely to trade with counterparties whose credit risk is highly correlated with the credit risk of the reference entities and with counterparties whose credit quality is relatively low. Furthermore, we examine ...
Report
The Netting Efficiencies of Marketwide Central Clearing
Market disruptions in response to the COVID pandemic spurred calls for the consideration of marketwide central clearing of Treasury securities, which might better enable dealers to intermediate large customer trading flows. We assess the netting efficiencies of increased central clearing using nonpublic Treasury TRACE transactions data. We find that central clearing of all outright trades would have lowered dealers’ daily gross settlement obligations by roughly $330 billion (60 percent) in the weeks preceding and following the market disruptions of March 2020, but nearly $800 billion (70 ...
Speech
A Season of Change for the U.S. Treasury Market
Remarks at the ISDA/SIFMA Treasury Forum, New York City.
Speech
Central Clearing in the U.S. Treasury Market: The Why and the How
Remarks at the Treasury Clearing Forum: The Evolution of Agency Clearing, Futures Industry Association (FIA), New York City.