Incentive compatible centralised clearing

Bruno Biais, Florian Heider and Marie Hoerova

Financial Stability Review, 2013, issue 17, 161-168

Abstract: Policy-makers around the world recognise central clearing counterparties (CCPs) as a key tool to enhance financial stability. Recent research supports the arguments for an increased role for CCPs. CCPs can insure against counterparty risk through mutualisation, enable implementation of adequate margin requirements, save on collateral through greater netting efficiency and promote ransparency in the market. The authors point out, however, that information asymmetries matter for clearing and that there may be a trade-off between ex post insurance and ex ante incentives. To be beneficial central clearing must therefore be incentive compatible. The authors discuss how risk management practices of CCPs can be designed to mitigate incentive problems. CCPs themselves must be properly governed, supervised and their competitive environment carefully monitored.

Date: 2013
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