The impact of the leverage ratio on client clearing

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 15 June 2018

Staff Working Paper No. 735
By Jonathan Acosta-Smith, Gerardo Ferrara and Francesc Rodriguez-Tous

As part of the post-crisis regulatory reform, many interest-rate derivative transactions are required to be centrally cleared. Nevertheless, the treatment of this type of transaction under the leverage ratio (LR) requirement does not allow for the use of initial margin to reduce the exposure, thereby increasing capital costs. As a result, LR affected clearing member banks may be more reluctant to provide central clearing services to clients given this additional cost. This in turn can prevent some real economy firms from hedging their risks. We analyse whether this is the case by exploiting detailed confidential transaction and portfolio level data as well as the introduction and posterior tightening of the LR in the UK in a diff-in-diff framework. Our results suggest that the LR had a disincentivising effect on client clearing, both in terms of daily transactions as well as the number of clients, but this impact seems to be driven by a reduced willingness to take on new clients.

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