Does central clearing affect counterparty risk and liquidity risk in the sovereign CDS market?
44 Pages Posted: 9 Jul 2019 Last revised: 12 Oct 2022
There are 2 versions of this paper
Does central clearing affect counterparty risk and liquidity risk in the sovereign CDS market?
Does Central Clearing Affect Counterparty Risk and Liquidity Risk in the Sovereign CDS Market?
Date Written: October 11, 2022
Abstract
Central counterparty clearing houses (CCPs) provide risk management for OTC transactions. Using a global sample of sovereign credit default swaps (CDS) issued between 2010 and 2017, this paper analyzes the impact of the structural shift from over-the-counter to voluntary CCP clearing of single-name CDS in late 2013 on CDS pricing. The results suggest that sovereign CDS spreads are insignificantly affected by counterparty risk when a large fraction of globally outstanding sovereign CDS is cleared through CCPs. Therefore, CCP clearing mitigates a major source of systemic risk in the CDS market. In contrast, CCP clearing has no significant effect on CDS market liquidity. Moreover, CDS spreads are mainly driven by local factors as opposed to global factors.
Keywords: Credit default swaps, central counterparty clearing, sovereign credit risk, counterparty risk, liquidity risks, systemic risk
JEL Classification: G15, G18, G23, G32
Suggested Citation: Suggested Citation