The Cost of Clearing Fragmentation

Benos, Evangelos; Huang, Wenqian; Menkveld, Albert J; Vasios, Michalis

Abstract

Fragmenting clearing across multiple central counterparties (CCPs) is costly because global dealers cannot net positions across CCPs. They have to collateralize both the short position in one CCP and an offsetting long position in another CCP. This, coupled with a structural net order imbalance across CCPs, can cause prices to persistently differ across them (“the CCP basis”). Tests based on unique CCP data for interest-rate derivatives (IRDs) yield broad empirical support for this intuition and suggest that the clearing friction costs sellers clearing in LCH, the largest European CCP for IRDs, $80 million daily.

Citation

Benos, E., Huang, W., Menkveld, A. J., & Vasios, M. (2024). The Cost of Clearing Fragmentation. Management Science, 70(6), 3581-3596. https://doi.org/10.1287/mnsc.2023.4867

• Journal Article Type: Article
• Acceptance Date: Oct 13, 2022
• Online Publication Date: Jul 28, 2023
• Publication Date: 2024-06
• Deposit Date: Nov 23, 2022
• Publicly Available Date: Nov 25, 2022
• Journal: Management Science
• Print ISSN: 0025-1909
• Electronic ISSN: 1526-5501
• Publisher: INFORMS
• Peer Reviewed: Peer Reviewed
• Volume: 70
• Issue: 6
• Pages: 3581-3596
• DOI: https://doi.org/10.1287/mnsc.2023.4867
• Keywords: central clearing; CCP basis; collateral; fragmentation * Evangelos Benos: EvangelosBenos@nottinghamacuk Wenqian Huang: WenqianHuang@bisorg Albert J Menkveld: albertjmenkveld@gmailcom Michalis Vasios: michalisv@gmailcom We would like to thank
• Public URL: https://nottingham-repository.worktribe.com/output/14033140
• Publisher URL: https://pubsonline.informs.org/doi/10.1287/mnsc.2023.4867