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Central counterparties

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Author Info

  • Koeppl, Thorsten V.
  • Monnet, Cyril

Abstract

Central counterparties (CCPs) have increasingly become a cornerstone of financial markets infrastructure. We present a model where trades are time-critical, liquidity is limited and there is limited enforcement of trades. We show a CCP novating trades implements efficient trading behaviour. It is optimal for the CCP to face default losses to achieve the efficient level of trade. To cover these losses, the CCP optimally uses margin calls, and, as the default problem becomes more severe, also requires default funds and then imposes position limits. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/42.

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Date of creation: 2008
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Handle: RePEc:zbw:cfswop:200842

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Related research

Keywords: Central Counterparty; Clearing; Default; Collateral; Risk Management;

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Citations

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Cited by:
  1. 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.
  2. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
  3. Cyril Monnet, 2011. "Rehypothecation," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 18-25.
  4. Thorsten V. Koeppl, 2013. "The Limits of Central Counterparty Clearing: Collusive Moral Hazard and Market Liquidity," Working Papers 1312, Queen's University, Department of Economics.
  5. Thorsten V. Koeppl, 2011. "Time for Stability in Derivatives Markets – a New Look at Central Counterparty Clearing for Securities Markets," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 329, May.
  6. Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012. "When Lower Risk Increases Profit: Competition and Control of a Central Counterparty," Working Papers 12-35, Bank of Canada.
  7. Douglas D. Evanoff & Daniela Russo & Robert Steigerwald, 2006. "Policymakers, researchers, and practitioners discuss the role of central counterparties," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 2-21.
  8. Biais, Bruno & Heider, Florian & Hoerova, Marie, 2012. "Clearing, counterparty risk and aggregate risk," Working Paper Series 1481, European Central Bank.
  9. Joshua Slive & Jonathan Witmer & Elizabeth Woodman, 2012. "Liquidity and Central Clearing: Evidence from the CDS Market," Working Papers 12-38, Bank of Canada.
  10. David Mills & Francesca Carapella, 2012. "Information insensitive securities: the benefits of central counterparties," 2012 Meeting Papers 1032, Society for Economic Dynamics.
  11. Borghan Nezami Narajabad & Cyril Monnet, 2012. "Why Rent When You Can Buy? A Theory of Repurchase Agreements," 2012 Meeting Papers 647, Society for Economic Dynamics.
  12. Siyi Zhu, 2011. "Is there a 'race to the bottom' in central counterparties competition?," DNB Occasional Studies 906, Netherlands Central Bank, Research Department.

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