Central clearing and collateral demand

We use an extensive data set of bilateral credit default swap (CDS) positions to estimate the impact on collateral demand of new clearing and margin regulations. The estimated collateral demands include initial margin and the frictional demands associated with the movement of variation margin through the network of market participants. We estimate the impact on total collateral demand of more widespread initial margin requirements, increased novation of CDS to central clearing parties (CCPs), an increase in the number of clearing members, the proliferation of CCPs of both specialized and non-specialized types, collateral rehypothecation practices, and client clearing. System-wide collateral demand is increased significantly by the application of initial margin requirements for dealers, whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements, mandatory central clearing is shown to lower, not raise, system-wide collateral demand, provided there is no significant proliferation of CCPs. Central clearing does, however, have significant distributional consequences for collateral requirements across market participants.