IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2018-17.html
   My bibliography  Save this paper

Transparency and Collateral : Central versus Bilateral Clearing

Author

Listed:
  • Gaetano Antinolfi

    (Washington University in St. Louis
    Board of Governors of the Federal Reserve System (U.S.)
    Cornell University)

  • Francesca Carapella

    (Georgetown University
    Board of Governors of the Federal Reserve System (U.S.))

  • Francesco Carli

Abstract

Bilateral financial contracts typically require an assessment of counterparty risk. Central clearing of these financial contracts allows market participants to mutualize their counterparty risk, but this insurance may weaken incentives to acquire and to reveal information about such risk. When considering this trade-off, participants would choose central clearing if information acquisition is incentive compatible. If it is not, they may prefer bilateral clearing, when this choice prevents strategic default while economizing on costly collateral. In either case, participants independently choose the efficient clearing arrangement. Consequently, central clearing can be socially inefficient under certain circumstances. These results stand in contrast to those in Achary and Bisin (2014), who find that central clearing is always the optimal clearing arrangement.

Suggested Citation

  • Gaetano Antinolfi & Francesca Carapella & Francesco Carli, 2018. "Transparency and Collateral : Central versus Bilateral Clearing," Finance and Economics Discussion Series 2018-017, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2018-17
    DOI: 10.17016/FEDS.2018.017
    as

    Download full text from publisher

    File URL: https://www.federalreserve.gov/econres/feds/files/2018017pap.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Cyril Monnet & Thorsten Koeppl, 2010. "The emergence and future of central counterparties," Working Papers 10-30, Federal Reserve Bank of Philadelphia, revised 2010.
    2. Bignon, Vincent & Vuillemey, Guillaume, 2016. "The Failure of a Clearinghouse: Empirical Evidence," CEPR Discussion Papers 11630, C.E.P.R. Discussion Papers.
    3. Randall S. Kroszner, 2006. "Central counterparty clearing: history, innovation, and regulation," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 30(Q IV), pages 37-41.
    4. Bech, Morten L. & Atalay, Enghin, 2010. "The topology of the federal funds market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5223-5246.
    5. 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.
    6. David Mills & Francesca Carapella, 2012. "Information insensitive securities: the benefits of central counterparties," 2012 Meeting Papers 1032, Society for Economic Dynamics.
    7. Koeppl, Thorsten & Monnet, Cyril & Temzelides, Ted, 2012. "Optimal clearing arrangements for financial trades," Journal of Financial Economics, Elsevier, vol. 103(1), pages 189-203.
    8. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
    9. Ricardo J. Caballero & Alp Simsek, 2009. "Complexity and Financial Panics," NBER Working Papers 14997, National Bureau of Economic Research, Inc.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gaetano Antinolfi & Francesca Carapella & Francesco Carli, 2019. "Transparency and Collateral: The Design of CCPs' Loss Allocation Rules," Finance and Economics Discussion Series 2019-058, Board of Governors of the Federal Reserve System (U.S.).
    2. Fiedor, PaweĊ‚, 2018. "Clearinghouse-Five: determinants of voluntary clearing in European derivatives markets," ESRB Working Paper Series 72, European Systemic Risk Board.

    More about this item

    Keywords

    Central counterparties; Collateral; Limited commitment;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2018-17. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ryan Wolfslayer ; Keisha Fournillier). General contact details of provider: http://edirc.repec.org/data/frbgvus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.