This paper examines the effect of heterogeneity in clearing members’ exposure management practices on system-wide expected exposure under central clearing. Our network model specifies the dynamics of pre-netted interbank exposure as a joint stochastic process that shapes interdependent bank-to-bank exposure distributions beyond normality. Employing over-the-counter derivatives market data provided by the U.S. Office of the Comptroller of the Currency, our simulation results indicate that heterogeneity in bank-to-bank exposure dynamics and size is systemically desirable in general, while the entire system benefits more from central clearing in a more homogeneous environment. Furthermore, policymakers should incentivize individual clearing members to enhance resiliency and stability in counterparty exposure management to maximize netting efficiency under central clearing.​

Keywords: Central Clearing; Exposure Distribution; Netting Efficiency; Heterogeneity; ity; Simulation; Stochastic Network Model
JEL Codes: C15, C46, G17, G21​