Economics, Econometrics and Finance
4 years ago

Central clearing reduces counterparty risk and boosts liquidity in CDS market.

Journal of Financial Economics
The impact of central clearing on counterparty risk, liquidity, and trading: Evidence from the credit default swap market
Yee Cheng Loon, Zhaodong Zhong

Paper Summary

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Central clearing in the credit default swap market reduces counterparty risk and lowers systemic risk. CDS spreads increase initially but are lower than settlement spreads. Dealer credit risk becomes less influential after central clearing starts. Post-trade transparency improves liquidity and trading activity.