Centralized Clearing for Over-the-Counter Derivatives

Gordon Rausser, William Balson and Reid Stevens

Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: Systemic risk propagated through over-the-counter derivatives can best be managed by a public-private central counterparty clearing house (CCP). Though private CCPs provide an adequate amount of clearing's private good, they do not provide the socially optimal level of the public good or impure goods. By undersupplying both public and impure goods, private CCPs may exacerbate the conditions under which financial crises develop and propagate. A public-private partnership could align incentives so that the CCP produces the socially optimal level of the private, public, and impure goods. A partnership using a two-part pricing scheme for OTC structured composite transactions could properly compensate both partners and provide an effective policy instrument for controlling systemic risk. Moreover this structure, in contrast to current proposed government regulations, will not drive out the "good" with the "bad" OTC derivative instruments.

Keywords: risk; econometrics; econometric models; Social and Behavioral Sciences (search for similar items in EconPapers)
Date: 2009-09-18
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Related works:
Journal Article: Centralized clearing for over‐the‐counter derivatives (2010)
Working Paper: Centralized Clearing for Over-the-Counter Derivatives (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:cdl:agrebk:qt494976mk

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