BoE research suggests leverage ratio disincentives client clearing

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.

This BoE staff working paper analyzes 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. Results suggest that the LR had a disincentivizing 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.

Read the full paper

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