This working paper from the Office of Financial Research (OFR) examines the economic impacts of client clearing services, which now dominate risk management in centrally cleared markets. Utilizing confidential transaction-level data for credit default swaps, the study finds that client clearing enhances netting efficiency for dealers and provides pricing advantages for clients. The adoption of central clearing encourages clients to broaden their dealer relationships, thereby improving market access and fostering competition. Clients' reliance on clearing member firms, particularly those with strong credit quality and established relationships, is highlighted as a key factor in accessing central counterparties. The paper also notes that while offering these services benefits member firms through improved client retention and pricing power, clients' dependence on clearing members can create operational fragilities during periods of market stress, especially for those with limited member relationships.

The findings are particularly relevant given recent clearing mandates, especially in U.S. Treasury markets. While this is a working paper and not a regulatory rule, compliance officers in financial institutions involved in clearing services should review the analysis to understand the operational and market structure implications. The paper suggests that firms offering client clearing services can gain competitive advantages, but must also manage the associated operational risks. Regulated entities should consider how these insights align with their current risk management frameworks and client relationship strategies, especially in light of evolving regulatory requirements.