Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/203320
Authors: 
Kubitza, Christian
Pelizzon, Loriana
Getmansky Sherman, Mila
Year of Publication: 
2019
Series/Report no.: 
SAFE Working Paper No. 235
Abstract: 
Through the lens of market participants' objective to minimize counterparty risk, we investigate central clearing in derivatives markets, and its interaction with systematic risk, portfolio directionality, and loss sharing. Previous studies suggest that central clearing always reduces counterparty risk for a sufficiently large number of clearing members. We show that this is not the case - mostly because of loss sharing. Central clearing can increase counterparty risk, particularly during extreme market events, for traders with directional portfolios, and because CCPs mutualize default losses. Our results are consistent with the reluctance to clear derivative trades in the absence of a clearing obligation.
Subjects: 
Central Clearing
Counterparty Risk
Systematic Risk
OTC markets
Derivatives
Margin
JEL: 
G01
G14
G18
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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