The Warwick Critical Finance group invited Lorenzo Genito, PhD Candidate and Sessional Teacher at the PAIS Department, to speak about his doctoral research on the role of clearing houses and their impact on financial stability in the Eurozone.
This study explores the role of central counterparty clearing houses (CCPs) in influencing market sentiment during the euro crisis. The literature understands sovereign risk as primarily driven by fear of sovereign default, derived exogenously from domestic and European-level weaknesses. However, the ways in which market sentiment is shaped endogenously by market actors and constituted by elements other than fear of default is not sufficiently accounted for. This paper argues that the risk management strategies of LCH.Clearnet – Europe’s largest CCP – influenced market sentiment by increasing the cost for using specific sovereign bonds as collateral in repurchase contracts, resulting in bond sell-offs and yield hikes. The findings suggest that market sentiment towards sovereign risk was not solely influenced by default fears, but also by the usability of sovereign bonds as collateral in repurchase operations. These conclusions point to the increasing systemic role of CCPs for the stability of financial markets.