Central Counterparties

Thorsten V. Koeppl () and Cyril Monnet ()

No 513, 2006 Meeting Papers from Society for Economic Dynamics

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

Keywords: Central Counterparty; Governance; Default; Collateral (search for similar items in EconPapers)
JEL-codes: G20 G30 (search for similar items in EconPapers)
Date: 2006-12-03
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Persistent link: http://EconPapers.repec.org/RePEc:red:sed006:513

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