Central clearing and collateral demand


Journal of Financial Economics

May 2015, vol. 116, n°2, pp.237-256

Departments: Finance, GREGHEC (CNRS)

Keywords: Central clearing party; Margin; Credit default swap; Collateral; Client clearing

We use an extensive data set of bilateral credit default swap (CDS) positions to estimatethe impact on collateral demand of new clearing and margin regulations. The estimatedcollateral demands include initial margin and the frictional demands associated with themovement of variation margin through the network of market participants. We estimatethe impact on total collateral demand of more widespread initial margin requirements,increased novation of CDS to central clearing parties (CCPs), an increase in the number ofclearing members, the proliferation of CCPs of both specialized and non-specialized types,collateral rehypothecation practices, and client clearing. System-wide collateral demand isincreased significantly by the application of initial margin requirements for dealers,whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements,mandatory central clearing is shown to lower, not raise, system-wide collateraldemand, provided there is no significant proliferation of CCPs. Central clearing does,however, have significant distributional consequences for collateral requirements acrossmarket participants