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Clearing networks

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  • Galbiati, Marco
  • Soramäki, Kimmo

Abstract

In several financial markets, counterparty risk is reallocated away from traders via ‘novation’, a step of the clearing process. By novation, a third party steps into a bilateral contract, guaranteeing performance of both legs of the trade. Central counterparties (CCPs) are entities whose special purpose is novating trades, relieving market participants from counterparty risk. However, in most cases, the CCP is not the sole novator: the CCP novates contracts between its clearing members, which in turn novate trades for other (typically smaller) participants and so on.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 83 (2012)
Issue (Month): 3 ()
Pages: 609-626

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Handle: RePEc:eee:jeborg:v:83:y:2012:i:3:p:609-626

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Central counterparty; CCP; Clearing; Settlement; Network analysis;

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References

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  8. Q. Farooq Akram & Casper Christophersen, 2010. "Interbank overnight interest rates - gains from systemic importance," Working Paper 2010/11, Norges Bank.
  9. Marco Galbiati & Simone Giansante, 2010. "Emergence of networks in large value payment systems (LVPSs)," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 0110, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
  10. John P Jackson & Mark J Manning, 2007. "Comparing the pre-settlement risk implications of alternative clearing arrangements," Bank of England working papers 321, Bank of England.
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