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The impact of the leverage ratio on client clearing

Author

Listed:
  • Smith, Jonathan

    (Bank of England)

  • Ferrara, Gerardo

    (Bank of England)

  • Rodriguez, Francesc

    (Cass Business School)

Abstract
As part of the post-crisis regulatory reform, many interest-rate derivative transactions are required to be centrally cleared. Nevertheless, the treatment of this type of transaction under the leverage ratio (LR) requirement does not allow for the use of initial margin to reduce the exposure, thereby increasing capital costs. As a result, LR affected clearing member banks may be more reluctant to provide central clearing services to clients given this additional cost. This in turn can prevent some real economy firms from hedging their risks. We analyse whether this is the case by exploiting detailed confidential transaction and portfolio level data as well as the introduction and posterior tightening of the LR in the UK in a diff-in-diff framework. Our results suggest that the LR had a disincentivising effect on client clearing, both in terms of daily transactions as well as the number of clients, but this impact seems to be driven by a reduced willingness to take on new clients.

Suggested Citation

  • Smith, Jonathan & Ferrara, Gerardo & Rodriguez, Francesc, 2018. "The impact of the leverage ratio on client clearing," Bank of England working papers 735, Bank of England.
    • Handle: RePEc:boe:boeewp:0735
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/the-impact-of-the-leverage-ratio-on-client-clearing.pdf
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    Citations

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    Cited by:

    1. Van Horen, Neeltje & Kotidis, Antonis, 2018. "Repo market functioning: the role of capital regulation," Bank of England working papers 746, Bank of England.
    2. Breckenfelder, Johannes & Ivashina, Victoria, 2021. "Bank balance sheet constraints and bond liquidity," Working Paper Series 2589, European Central Bank.
    3. Nahiomy Alvarez & John McPartland, 2019. "The Concentration of Cleared Derivatives: Can Access to Direct CCP Clearing for End-Users Address the Challenge?," Working Paper Series WP-2019-6, Federal Reserve Bank of Chicago.
    4. Berna DOĞAN & Melek ACAR, 2020. "The impact of corporate governance on cost of capital: an application on the firms in the manufacturing industry in Borsa Istanbul," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 12(1), pages 65-88, May.
    5. Evangelos Benos & Wenqian Huang & Albert Menkveld & Michalis Vasios, 2024. "The Cost of Clearing Fragmentation," Management Science, INFORMS, vol. 70(6), pages 3581-3596, June.
    6. Falter, Alexander, 2019. "Macro to the rescue? An analysis of macroprudential instruments to regulate housing credit," Discussion Papers 25/2019, Deutsche Bundesbank.
    7. Dalla Fontana, Silvia & Holz auf der Heide, Marco & Pelizzon, Loriana & Scheicher, Martin, 2019. "The anatomy of the euro area interest rate swap market," Working Paper Series 2242, European Central Bank.
    8. Vo, Quynh-Anh, 2021. "Interactions of capital and liquidity requirements: a review of the literature," Bank of England working papers 916, Bank of England.

    More about this item

    Keywords

    Financial regulation; leverage ratio; interest rate derivatives; clearing; banking;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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