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The emergence and future of central counterparties

  • Thorsten V. Koeppl
  • Cyril Monnet

The authors explain why central counterparties (CCPs) emerged historically. With standardized contracts, it is optimal to insure counterparty risk by clearing those contracts through a CCP that uses novation and mutualization. As netting is not essential for these services, it does not explain why CCPs exist. In over-the-counter markets, as contracts are customized and not fungible, a CCP cannot fully guarantee contract performance. Still, a CCP can help: As bargaining leads to an inefficient allocation of default risk relative to the gains from customization, a transfer scheme is needed. A CCP can implement it by offering partial insurance for customized contracts.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 10-30.

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Date of creation: 2010
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Handle: RePEc:fip:fedpwp:10-30
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