FRB Staff Considers Bilateral Versus Central Clearing

In a new working paper, staff at the Federal Reserve Board Divisions of Research and Statistics and of Monetary Affairs analyzed "the desirability of central versus bilateral clearing." They concluded that central clearing is not inherently preferable; rather, it "depend[s] on traders' characteristics and the institutional features defining the operation of the CCP." The authors argue that while mandatory clearing is intended to address the lack of transparency in OTC derivatives markets, the consequences "on the incentives of financial market participants to acquire information about each other are not well understood."

The authors stated that central clearing "may weaken [counterparties'] incentives to acquire and reveal information about such risks." As a result, they noted, crucial information about counterparty risk acquired in a bilateral relationship "may be lost when clearing services are transferred to a central counterparty which operates under