Journal of Financial Market Infrastructures

The centrally cleared interest rate derivatives market: how are clients changing the risk perspective?

Pawel Fiedor, Sarah Lapschies and Lucia Orszaghova

  • Client clearing is essential for a full understanding of the structure and stability of the interest rate derivatives market.
  • In the EU, client clearing is more diverse than direct clearing in terms of sectors and geography.
  • Central counterparties are not systemic in isolation but rather in conjunction with the big derivatives dealers.

The post-crisis reforms of the derivatives  markets have pushed central clearing as a way to reduce counterparty credit risk and increase financial stability,  making central counterparties an important part of the financial system. This paper analyzes counterparty relationships within both direct (house) and client clearing in the interest rate derivatives market in the European Union. There is a growing  literature on various aspects of central clearing, yet very little attention has been paid to client clearing and its implications for financial stability and contagion effects. By means of a network analysis, we show that the structure of the network, the geography and sector of risk and the relevance of various types of counterparties for the stability of the system of counterparty relationships alter significantly  if we take a holistic view. Our analysis shows that big derivatives dealers are also systemic in this market, together with central counterparties.

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