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The Cost of Clearing Fragmentation

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

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Authors

EVANGELOS BENOS Evangelos.Benos@nottingham.ac.uk
Chair in Finance, risk and Banking

Wenqian Huang

Albert J Menkveld

Michalis Vasios



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. (2023). The Cost of Clearing Fragmentation. Management Science, 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 Jul 28, 2023
Deposit Date Nov 23, 2022
Publicly Available Date Nov 25, 2022
Journal Management Science
Print ISSN 0025-1909
Electronic ISSN 1526-5501
Peer Reviewed Peer Reviewed
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

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