Central counterparties (CCPs) have increasingly become a cornerstone of financial markets infrastructure. We present a model where CCPs are necessary to implement efficient trade when trades are time-critical, liquidity is limited and there is limited enforcement of trades. We then show that -- when collateral is sufficient to avoid default -- profit-maximizing CCPs ``overcollateralize'' trades relative to user-oriented CCPs and, hence, are less efficient. However, when collateral is not covering all default exposure, user-oriented CCPs avoid default, but allow for less trade, while profit-maximizing CCPs yield a higher volume of trade despite allowing for some default. In such a situation, profit-maximzing CCPs can be efficient, provided overall default costs are not too high
|Date of creation:||03 Dec 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:red:sed006:513. 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: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.