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Incentive compatible centralised clearing

Listed author(s):
  • Biais, B.
  • Heider, F.
  • Hoerova, M.

Policy-makers around the world recognise central clearing counterparties (CCPs) as a key tool to enhance financial stability. Recent research supports the arguments for an increased role for CCPs. CCPs can insure against counterparty risk through mutualisation, enable implementation of adequate margin requirements, save on collateral through greater netting efficiency and promote ransparency in the market. The authors point out, however, that information asymmetries matter for clearing and that there may be a trade-off between ex post insurance and ex ante incentives. To be beneficial central clearing must therefore be incentive compatible. The authors discuss how risk management practices of CCPs can be designed to mitigate incentive problems. CCPs themselves must be properly governed, supervised and their competitive environment carefully monitored.

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File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/financial-stability-review-17_2013-04.pdf
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Article provided by Banque de France in its journal Financial Stability Review.

Volume (Year): (2013)
Issue (Month): 17 (April)
Pages: 161-168

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Handle: RePEc:bfr:fisrev:2011:17:15
Contact details of provider: Postal:
Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

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  1. Tano Santos & Jose A. Scheinkman, 2001. "Competition among Exchanges," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 1027-1061.
  2. Stephens, Eric & Thompson, James R., 2014. "CDS as insurance: Leaky lifeboats in stormy seas," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 279-299.
  3. Bruno Biais & Florian Heider & Marie Hoerova, 2016. "Risk-Sharing or Risk-Taking? Counterparty Risk, Incentives, and Margins," Journal of Finance, American Finance Association, vol. 71(4), pages 1669-1698, 08.
  4. Acharya, Viral & Bisin, Alberto, 2014. "Counterparty risk externality: Centralized versus over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 149(C), pages 153-182.
  5. Daniel Heller & Nicholas Vause, 2012. "Collateral requirements for mandatory central clearing of over-the-counter derivatives," BIS Working Papers 373, Bank for International Settlements.
  6. Bruno Biais & Florian Heider & Marie Hoerova, 2012. "Clearing, Counterparty Risk, and Aggregate Risk," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(2), pages 193-222, July.
  7. Patrick Bolton & Martin Oehmke, 2011. "Credit Default Swaps and the Empty Creditor Problem," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2617-2655.
  8. Christine A. Parlour & Uday Rajan, 2001. "Competition in Loan Contracts," American Economic Review, American Economic Association, vol. 91(5), pages 1311-1328, December.
  9. James R. Thompson, 2010. "Counterparty Risk in Financial Contracts: Should the Insured Worry About the Insurer?," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1195-1252.
  10. Yaron Leitner, 2012. "Inducing Agents to Report Hidden Trades: A Theory of an Intermediary," Review of Finance, European Finance Association, vol. 16(4), pages 1013-1042.
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