The Cost of Clearing Fragmentation

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.

Automated summary

Fragmenting clearing across multiple central counterparties (CCPs) is costly, as global dealers cannot net positions across CCPs. This leads to the need for collateralizing both short and offsetting long positions across different CCPs, causing persistent differences in prices (CCP basis). Empirical tests using unique CCP data for interest-rate derivatives (IRDs) provide broad support for this idea and estimate daily clearing friction costs of $80 million for sellers clearing in LCH, the largest European CCP for IRDs.