Journal Article

Does a Central Clearing Counterparty Reduce Counterparty Risk?

Darrell Duffie and Haoxiang Zhu

in The Review of Asset Pricing Studies

Volume 1, issue 1, pages 74-95
Published in print December 2011 | ISSN: 2045-9920
Published online July 2011 | e-ISSN: 2045-9939 | DOI: https://dx.doi.org/10.1093/rapstu/rar001
Does a Central Clearing Counterparty Reduce Counterparty Risk?

Show Summary Details

Preview

We show whether central clearing of a particular class of derivatives lowers counterparty risk. For plausible cases, adding a central clearing counterparty (CCP) for a class of derivatives such as credit default swaps reduces netting efficiency, leading to an increase in average exposure to counterparty default. Further, clearing different classes of derivatives in separate CCPs always increases counterparty exposures relative to clearing the combined set of derivatives in a single CCP. We provide theory as well as illustrative numerical examples of these results that are calibrated to notional derivatives position data for major banks.

Keywords: G01; G14; G18; G28

Journal Article.  9218 words.  Illustrated.

Subjects: Asset Pricing

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content. subscribe or login to access all content.