The cost of clearing fragmentation

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 31 May 2019

Staff Working Paper No. 800

By Evangelos Benos, Wenqian Huang, Albert Menkveld and Michalis Vasios

Fragmenting clearing across multiple central counter-parties (CCPs) is costly. This is because dealers providing liquidity globally, cannot net trades cleared in different CCPs and this increases their collateral costs. These costs are then passed on to their clients through price distortions which take the form of a price differential (basis) when the same products are cleared in different CCPs. Using proprietary data, we document an economically significant CCP basis for dollar swap contracts cleared both at the Chicago Mercantile Exchange (CME) and the London Clearing House (LCH) and provide empirical evidence consistent with a collateral cost explanation of this basis.

This version was updated in November 2019.

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