The pitfalls of central clearing in the presence of systematic risk
Authors: Mila Getmansky (UMass Amherst), Christian Kubitza (Goethe University), Loriana Pelizzon (Goethe University and SAFE)
Title: The pitfalls of central clearing in the presence of systematic risk
Abstract: We examine the impact of systematic risk and extreme events on counterparty risk when some assets are centrally cleared. Systematic risk substantially undermines benefits of central clearing. As a consequence, central clearing unambiguously increases counterparty exposures 1) in economic crises and 2) when margin requirements for cleared derivatives are smaller than for non-cleared ones. The ultimate benefit of central clearing for counterparties depends on the direction of their positions, where entities being long bear the counterparty risk of those being short. Our results have substantial implications for the design of derivatives markets.