Does a Central Clearing Counterparty Reduce Counterparty Risk?

We show whether central clearing of a particular class of derivatives lowers counterparty risk. For plausible cases, adding a central clearing counterparty (CCP) for a class of derivatives such as credit default swaps reduces netting e±ciency, leading to an increase in average exposure to counterparty default. Clearing two or more diÆerent classes of derivatives in separate CCPs always increases counterparty exposures relative to clearing the combined set of derivatives in a single CCP.