Systemic Risk and Central Clearing Counterparty Design

Hamed Amini, Damir Filipović and Andreea Minca
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Hamed Amini: Ecole Polytechnique Fédérale de Lausanne
Damir Filipović: Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
Andreea Minca: Cornell University

No 13-34, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We examine the effects on a financial network of multilateral clearing via a central clearing counterparty (CCP) from an ex ante and ex post perspective. The CCP is capitalized with equity and a guarantee fund and it can charge a volume-based fee. We propose a CCP design which improves aggregate surplus, and reduces banks' liquidation and shortfall losses. We characterize the CCP's equity, fee and guarantee fund policies that reduce systemic risk and are incentive compatible for banks. A simulation study based on aggregate market data shows that central counterparty clearing can reduce systemic risk and improve banks' utility.

Keywords: Over the Counter Markets; Central Counterparty Clearing; Market Design; Financial Network; Contagion; Systemic Risk; Credit Default Swap Markets (search for similar items in EconPapers)
JEL-codes: C44 C54 C62 G01 G18 G32 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2013-06
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1334

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