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Central Counterparties

Author

Listed:
  • Thorsten Koeppl

    () (Department of Economics Queen's University)

  • Cyril Monnet

Abstract

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

Suggested Citation

  • Thorsten Koeppl & Cyril Monnet, 2006. "Central Counterparties," 2006 Meeting Papers 513, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:513
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    File URL: http://www.econ.queensu.ca/pub/faculty/koeppl/research/CCP_10312005.pdf
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    Cited by:

    1. David Mills & Francesca Carapella, 2012. "Information insensitive securities: the benefits of central counterparties," 2012 Meeting Papers 1032, Society for Economic Dynamics.
    2. Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012. "When Lower Risk Increases Profit: Competition and Control of a Central Counterparty," Staff Working Papers 12-35, Bank of Canada.
    3. Thorsten V. Koeppl, 2011. "Time for Stability in Derivatives Markets – a New Look at Central Counterparty Clearing for Securities Markets," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 329, May.
    4. Siyi Zhu, 2011. "Is there a 'race to the bottom' in central counterparties competition?," DNB Occasional Studies 906, Netherlands Central Bank, Research Department.
    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. Thorsten V. Koeppl, 2013. "The Limits of Central Counterparty Clearing: Collusive Moral Hazard and Market Liquidity," Working Papers 1312, Queen's University, Department of Economics.
    7. Joshua Slive & Jonathan Witmer & Elizabeth Woodman, 2012. "Liquidity and Central Clearing: Evidence from the CDS Market," Staff Working Papers 12-38, Bank of Canada.

    More about this item

    Keywords

    Central Counterparty; Governance; Default; Collateral;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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