The Limits of Central Counterparty Clearing: Collusive Moral Hazard and Market Liquidity

Thorsten Koeppl

No 274637, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: Can central counterparty (CCP) clearing control counterparty risk in the presence of risk taking that can aggravate such risk? When counterparty risk is not observable, I show that central clearing leads to higher collateral requirements for two different reasons. Without collusion about risk taking, a CCP offering diversication of risk cannot selectively forgo incentives for transactions that use collateral only for insurance. With collusion about risk taking, a CCP needs to charge collateral in line with the worst counterparty quality to control risk taking. Requiring more collateral reduces market liquidity and worsens incentives causing a feedback effect that amplifies collateral costs.

Keywords: Financial Economics; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 35
Date: 2013-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/274637/files/qed_wp_1312.pdf (application/pdf)

Related works:
Working Paper: The Limits Of Central Counterparty Clearing: Collusive Moral Hazard And Market Liquidity (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:274637

DOI: 10.22004/ag.econ.274637

Access Statistics for this paper

More papers in Queen's Economics Department Working Papers from Queen's University - Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().