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The Design of a Central Counterparty

Author

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  • Kuong, John Chi-Fong
  • Maurin, Vincent

Abstract

This paper analyzes the optimal allocation of losses via a Central Clearing Counterparty (CCP) in the presence of counterparty risk. A CCP can hedge this risk by mutualizing losses among its members. This protection, however, weakens members’ incentives for risk management. Delegating members’ risk monitoring to the CCP alleviates this tension in large markets. To discipline the CCP at minimum cost, members offer the CCP a junior tranche and demand capital contribution. Our results endogenize key layers of the default waterfall and deliver novel predictions on its composition, collateral requirements, and CCP ownership structure.

Suggested Citation

  • Kuong, John Chi-Fong & Maurin, Vincent, 2022. "The Design of a Central Counterparty," CEPR Discussion Papers 17679, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:17679
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    File URL: https://cepr.org/publications/DP17679
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    Keywords

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    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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