The Emergence and Future of Central Counterparties

Thorsten Koeppl and Cyril Monnet

No 273740, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: We explain why central counterparties (CCPs) emerged historically. With standardized contracts, it is optimal to insure counterparty risk by clearing those contracts through a CCP that uses novation and mutualization. As netting is not essential for these services, it does not explain why CCPs exist. In over-the-counter markets, as contracts are customized and not fungible, a CCP cannot fully guarantee contract performance. Still, a CCP can help: As bargaining leads to an inefficient allocation of default risk relative to the gains from customization, a transfer scheme is needed. A CCP can implement it by offering partial insurance for customized contracts.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 52
Date: 2010-06
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Related works:
Working Paper: The emergence and future of central counterparties (2010)
Working Paper: The Emergence And Future Of Central Counterparties (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:273740

DOI: 10.22004/ag.econ.273740

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