On July 26, 2016, the OFR published a working paper that examines whether new rules imposed on bilateral trading incentivize central clearing of derivatives. By comparing the total capital and collateral costs when banks transact bilaterally to the capital and collateral costs when they clear through CCPs, the study finds that central clearing is sometimes more expensive. While “the cost comparison does not necessarily favor central clearing, . . . when it does, the incentive may be driven by questionable differences in CCPs’ default waterfall resources.” In the absence of a cost advantage for central clearing, market participants may be motivated to customize contracts in order to trade them bilaterally. The authors find that without a cost advantage, banks may also be less inclined to move legacy trades to CCPs.
The OFR working paper is available at: https://financialresearch.gov/from-the-management-team/2016/07/26/central-clearing-ofderivatives-may-not-always-have-cost-advantage/.