BIS: The cost of clearing fragmentation

We find that the average CCP basis for dollar swap contracts was around 2 basis points during our sample period. This is economically significant as it translates into a daily opportunity cost of around $80 million for end users.

The CCP basis allows dealers to recoup increased collateral costs when clearing is fragmented. In those cases, dealers, who provide liquidity globally, cannot net their offsetting trades across CCPs. This increases their collateral costs. They pass these costs on to end users through the CCP basis. That is, dealers quote a higher price at a CCP where buyers prevail, and a lower price when sellers prevail.

Our analysis shows that the CCP basis increases in the amount of dealers’ posted collateral pledged with the CCP (ie the initial margin), dealers’ credit spread and debt overhang costs, and the order-flow imbalance in one CCP. The basis decreases in the volume share of sophisticated traders with access to both CCPs who can therefore clear where prices are more advantageous.

The full paper is available at https://www.bis.org/publ/work826.pdf

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