Clearinghouse-Five: Determinants of voluntary clearing in European derivatives markets

In the European Union, there is obligation to centrally clear certain credit and interest rate derivative contracts, while other trades can be voluntarily cleared through a central counterparty if the parties to the contract... [ view full abstract ]

In the European Union, there is obligation to centrally clear certain credit and interest rate derivative contracts, while other trades can be voluntarily cleared through a central counterparty if the parties to the contract wish to clear it thus. I use a dataset of all newly entered into derivatives contracts in the European Union between March 2016 and June 2017 to show the extent to which central clearing is being used for derivatives belonging to all five major asset classes, and to determine which characteristics of the contracts not under the clearing obligation affect the likelihood they would be centrally cleared on a voluntary basis. I show that currently only around 20\% of credit and 40\% of interest rate derivatives are centrally cleared, while equity, foreign exchange, and commodity derivatives are barely centrally cleared. I also show that there are significant effects of scale connected with central clearing, both in terms of previous clearing activity of the counterparty and the notional of the specific contract. Finally, I show that various characteristics of the contract, such as the maturity and the type of counterparty involved, also have significant impact on the probability of a trade being centrally cleared, but these effects tend to be ambiguous and depend on the specific combination of factors.