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: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
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