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Loss Sharing in Central Clearinghouses: Winners and Losers

Author

Listed:
  • Christian Kubitza

    (European Central Bank)

  • Loriana Pelizzon

    (Leibniz Institute SAFE, Goethe University Frankfurt, and Ca'Foscari University of Venice)

  • Mila Getmansky Sherman

    (Isenberg School of Management, University of Massachusetts Amherst)

Abstract
Central clearing counterparties (CCPs) were established to mitigate default losses resulting from counterparty risk in derivatives markets. In a parsimonious model, we show that clearing benefits are distributed unevenly across market participants. Loss sharing rules determine who wins or loses from clearing. Current rules disproportionately benefit market participants with flat portfolios. Instead, those with directional portfolios are relatively worse off, consistent with their reluctance to voluntarily use central clearing. Alternative loss sharing rules can address cross-sectional disparities in clearing benefits. However, we show that CCPs may favor current rules to maximize fee income, with externalities on clearing participation.

Suggested Citation

  • Christian Kubitza & Loriana Pelizzon & Mila Getmansky Sherman, 2021. "Loss Sharing in Central Clearinghouses: Winners and Losers," ECONtribute Discussion Papers Series 066, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:066
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Christina Brinkmann, 2023. "Differentiation in Risk Profiles," CRC TR 224 Discussion Paper Series crctr224_2023_444, University of Bonn and University of Mannheim, Germany.
    2. Christina Brinkmann, 2022. "Imperfect Competition in Derivatives Markets," ECONtribute Discussion Papers Series 153, University of Bonn and University of Cologne, Germany.
    3. Grothe, Magdalena & Pancost, N. Aaron & Tompaidis, Stathis, 2023. "Collateral competition: Evidence from central counterparties," Journal of Financial Economics, Elsevier, vol. 149(3), pages 536-556.

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    More about this item

    Keywords

    Central Clearing; Counterparty Risk; Loss Sharing; OTC markets; Derivatives.;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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