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I am learning about central clearing.

In my understanding, CDS are usually cleared via central clearing.

But at the same time I heard that in case of too much correlation such as US bank selling protection w.r.t. US Gov, trades cannot happen b/c no one wants to enter into this wrong way risk.

If such CDS is centrally cleared there is no need to worry about correlation. Why people care about correlation between cds ref and protection seller? Or suc CDS cannot be centrally cleared?

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  • $\begingroup$ not a cds expert here but i would think that the whole purpose of central clearing is to eliminate counterparty risk via margining so entity/product corr should be irrelevant. wrong way risk and entity/product correlation matter for OTC products, not cleared ones. $\endgroup$
    – user35980
    Commented Oct 2, 2023 at 11:34
  • $\begingroup$ Suppose a French bank wants to sell CDS protection on OATs (obligations assimilables du trésor - EUR-denominated French sovereign debt). The EU is already paranoid about speculators buying CDS protection on EU sovereigns and makes it hard. Suppose later France, unable to print Euros, defaults on its sovereign debt, which is more realistic than the US example. It's very possible the French government will say, merde these evil speculators had bet that we would default, and they won their bet? We won't permit our banks to pay to these evil speculators! Unclear how central clearing would help. $\endgroup$ Commented Oct 2, 2023 at 15:43

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