Title: CDS spreads in the aftermath of central clearing

Authors: Orçun Kaya

Addresses: Deutsche Bank Research, Mainzer Landstraße 11-17, 60329, Frankfurt, Germany

Abstract: In an attempt to understand the impact of derivative market reforms, this paper focuses on the spreads of centrally cleared CDSs using a unique data set of voluntarily cleared non-financial single-name contracts over the period from January 2009 to June 2013. Controlling for a number of factors that previous studies identified as important determinants of credit risk, my results indicate that CDS spreads widen with the initiation of central clearing. I document that even though dealer risk is priced in CDS spreads and an increase in dealer risk narrows spreads, the initiation of central clearing does not necessarily change the pricing of counterparty risk for CDSs written on non-financial firms. On the contrary, I provide evidence that CDS volatility and central clearing widen CDS spreads jointly. Because the margin requirements of CCPs depend heavily on CDS spread variations observed in the past, observed widening in spreads is potentially caused by the collateral costs related to central clearing.

Keywords: central clearing; cost of trading; counterparty risk; credit default swaps; CDSs.

DOI: 10.1504/IJFMD.2017.087958

International Journal of Financial Markets and Derivatives, 2017 Vol.6 No.2, pp.75 - 101

Received: 16 May 2017
Accepted: 20 May 2017
Published online: 13 Nov 2017 *

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