This study investigates whether and how central clearing influences the
overall liquidity needs in a network of financial obligations. Utilizing the approach of
flow network theory, we show that the effect of adding a central clearing counterparty
(CCP) is decomposed into two effects: central routing, and central netting effects. Each
effect can produce different liquidity needs according to different liquidity scenarios.
The analysis indicates that adding a CCP in times of financial distress successfully
reduces the overall liquidity needs if and only if the netting efficiency of the CCP is
sufficiently high. Furthermore, once the economy is no longer in financial distress,
higher netting efficiency of the CCP could conversely increase the overall liquidity
needs. The results have implications for the effectiveness of CCPs in mitigating systemic
risk in times of financial distress, and their operating costs once the distress has
passed.This study investigates whether and how central clearing influences the
overall liquidity needs in a network of financial obligations. Utilizing the approach of
flow network theory, we show that the effect of adding a central clearing counterparty
(CCP) is decomposed into two effects: central routing, and central netting effects. Each
effect can produce different liquidity needs according to different liquidity scenarios.
The analysis indicates that adding a CCP in times of financial distress successfully
reduces the overall liquidity needs if and only if the netting efficiency of the CCP is
sufficiently high. Furthermore, once the economy is no longer in financial distress,
higher netting efficiency of the CCP could conversely increase the overall liquidity
needs. The results have implications for the effectiveness of CCPs in mitigating systemic
risk in times of financial distress, and their operating costs once the distress has
passed.

• Does a central clearing counterparty reduce liquidity needs?