AbstractCentral counterparties (CCPs) have increasingly become a cornerstone of financial markets infrastructure. We present a model where CCPs are necessary to implement efficient trade when trades are time-critical, liquidity is limited and there is limited enforcement of trades. We then show that -- when collateral is sufficient to avoid default -- profit-maximizing CCPs ``overcollateralize'' trades relative to user-oriented CCPs and, hence, are less efficient. However, when collateral is not covering all default exposure, user-oriented CCPs avoid default, but allow for less trade, while profit-maximizing CCPs yield a higher volume of trade despite allowing for some default. In such a situation, profit-maximzing CCPs can be efficient, provided overall default costs are not too high
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 513.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Central Counterparty; Governance; Default; Collateral;
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- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
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- NEP-ALL-2007-01-13 (All new papers)
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