The Economics of Central Clearing

Albert J. Menkveld; Guillaume Vuillemey

doi:10.1146/annurev-financial-100520-100321

The Economics of Central Clearing

Albert J. Menkveld
, Guillaume Vuillemey

Research output: Contribution to Journal › Review article › Academic › peer-review

Abstract

Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007-2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies, which along with classical studies are surveyed in this article. For example, multilateral netting, the insurance against counterparty risk, the effect of CCPs on asset prices and fire sales, margins setting, the default waterfall, and CCP governance are discussed here. We review both CCP theory and empirical work and conclude by discussing regulatory issues.

Original language	English
Pages (from-to)	153-178
Number of pages	26
Journal	Annual Review of Financial Economics
Volume	13
DOIs	https://doi.org/10.1146/annurev-financial-100520-100321
Publication status	Published - Nov 2021

Bibliographical note

Funding Information:
7. The regulation of CCPs is nontrivial. Network externalities create a role for regulators to coordinate investors on a socially desirable equilibrium. However, CCPs are systemic in nature because they absorb all counterparty risk in securities markets. This feature creates a need for regulatory oversight and, potentially, for financial support, which in turn creates moral hazard.

Publisher Copyright:
© 2021 Annual Reviews Inc.. All rights reserved.

Funding

7. The regulation of CCPs is nontrivial. Network externalities create a role for regulators to coordinate investors on a socially desirable equilibrium. However, CCPs are systemic in nature because they absorb all counterparty risk in securities markets. This feature creates a need for regulatory oversight and, potentially, for financial support, which in turn creates moral hazard.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 17 Partnerships for the Goals

Keywords

Central clearing
Counterparty risk
Default waterfall
Margin

Access to Document

10.1146/annurev-financial-100520-100321

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Cite this

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title = "The Economics of Central Clearing",

abstract = "Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007-2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies, which along with classical studies are surveyed in this article. For example, multilateral netting, the insurance against counterparty risk, the effect of CCPs on asset prices and fire sales, margins setting, the default waterfall, and CCP governance are discussed here. We review both CCP theory and empirical work and conclude by discussing regulatory issues.",

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year = "2021",

month = nov,

doi = "10.1146/annurev-financial-100520-100321",

language = "English",

volume = "13",

pages = "153--178",

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N2 - Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007-2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies, which along with classical studies are surveyed in this article. For example, multilateral netting, the insurance against counterparty risk, the effect of CCPs on asset prices and fire sales, margins setting, the default waterfall, and CCP governance are discussed here. We review both CCP theory and empirical work and conclude by discussing regulatory issues.

AB - Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007-2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies, which along with classical studies are surveyed in this article. For example, multilateral netting, the insurance against counterparty risk, the effect of CCPs on asset prices and fire sales, margins setting, the default waterfall, and CCP governance are discussed here. We review both CCP theory and empirical work and conclude by discussing regulatory issues.

KW - Central clearing

KW - Counterparty risk

KW - Default waterfall

KW - Margin

UR - https://www.scopus.com/pages/publications/85113796311

UR - https://www.scopus.com/pages/publications/85113796311#tab=citedBy

U2 - 10.1146/annurev-financial-100520-100321

DO - 10.1146/annurev-financial-100520-100321

M3 - Review article

AN - SCOPUS:85113796311

SN - 1941-1367

VL - 13

SP - 153

EP - 178

JO - Annual Review of Financial Economics

JF - Annual Review of Financial Economics

ER -

The Economics of Central Clearing

Abstract

Bibliographical note

Funding

UN SDGs

Keywords

Access to Document

Persistent URL (handle)

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