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Working Paper
Unintended Consequences of Regulating Central Clearing
Recent U.S. and European regulations promote centrally clearing derivatives to reduce complexity and systemic risk in the financial system. We argue that more clearing does not guarantee less systemic risk. We identify conditions under which the core clears less intensively than the periphery, which increases systemic risk by substituting multilateral netting for bilateral netting and making contagion less likely to start in the core but more likely to spread from the core. We study confidential derivatives regulatory data and find evidence of such clearing patterns. We further explore the ...