Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/231491
Authors: 
Kubitza, Christian
Pelizzon, Loriana
Getmansky, Mila
Year of Publication: 
2021
Series/Report no.: 
ECONtribute Discussion Paper No. 066
Publisher: 
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI), Bonn and Cologne
Abstract: 
Central clearing counterparties (CCPs) were created to reduce default losses for market participants in derivatives markets. We show that not all market participants benefit, and some are worse off. Loss sharing rules and their interaction with market network structure affect who are winners and losers. The loss sharing rule most widely used by CCPs is based on net risk. We develop a simple model which shows that this rule largely benefits market participants with flat portfolios but not participants with directional portfolios or those located in the periphery of the network. This result is consistent with the reluctance of (peripheral) end-users to voluntarily clear in practice. We investigate how to offset cross-sectional differences in loss sharing benefits, and highlight alternative loss sharing rules and centralized trading as potential remedies.
Subjects: 
Central Clearing
Counterparty Risk
Loss Sharing
OTC markets
Derivatives
JEL: 
G18
G23
G28
G12
Document Type: 
Working Paper

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