The paper examines how the rapid growth of client clearing in derivatives markets—especially credit default swaps—changes dealers’ incentives, client–dealer relationships, and potential fragilities in the clearing system.
Client clearing improves netting efficiency for dealers, lowering their gross exposures and regulatory or margin costs, and dealers pass some of these savings on via better pricing for cleared client trades compared with similar uncleared trades.
When clients adopt central clearing, they expand their networks of dealer trading partners and reduce counterparty concentration, which is consistent with enhanced competition—but most still rely on a small number of clearing members as agents, creating operational dependencies.
Acting as a clearing agent is costly, but it can boost dealers’ market‑making franchises by improving client retention and pricing power; at the same time, shocks to a major clearing member (like Credit Suisse after Archegos) can impair heavily dependent clients’ ability to clear, exposing a structural fragility in stressed markets.
“Our findings provide novel insights about the economic consequences of client clearing and are particularly relevant given recent clearing mandates, most notably in U.S. Treasury markets,”