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Central counterparties

Author

Listed:
  • Koeppl, Thorsten V.
  • Monnet, Cyril

Abstract

Central counterparties (CCPs) have increasingly become a cornerstone of financial markets infrastructure. We present a model where trades are time-critical, liquidity is limited and there is limited enforcement of trades. We show a CCP novating trades implements efficient trading behaviour. It is optimal for the CCP to face default losses to achieve the efficient level of trade. To cover these losses, the CCP optimally uses margin calls, and, as the default problem becomes more severe, also requires default funds and then imposes position limits.

Suggested Citation

  • Koeppl, Thorsten V. & Monnet, Cyril, 2008. "Central counterparties," CFS Working Paper Series 2008/42, Center for Financial Studies (CFS).
  • Handle: RePEc:zbw:cfswop:200842
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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. Siyi Zhu, 2011. "Is there a 'race to the bottom' in central counterparties competition?," DNB Occasional Studies 906, Netherlands Central Bank, Research Department.
    3. 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.
    4. 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.
    5. 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.
    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; Clearing; Default; Collateral; Risk Management;

    JEL classification:

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

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