Darrell Duffie and Haoxiang Zhu
Stanford University

Abstract

We show whether adding a central clearing counterparty (CCP) for a particular asset class, such as credit derivatives, improves the e±ciency of counterparty risk mitigation and collateral demands, relative to bilateral netting between pairs of dealers. We show that, for plausible cases, adding a CCP for one class of derivatives such as credit default swaps (CDS) can actually reduce netting e±ciency and thereby lead to an increase in collateral demands and average exposure to counterparty default. We also show that whenever it is e±cient to introduce a central clearing counterparty, it cannot be efficient to introduce more than one CCP for the same class of derivatives.

http://www.stanford.edu/~duffie/DuffieZhu.pdf