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Transparency and Collateral: Central versus Bilateral Clearing

Gaetano Antinolfi (), Francesca Carapella and Francesco Carli

No 2018-017, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Bilateral financial contracts typically require an assessment of counterparty risk. Central clearing of these financial contracts allows market participants to mutualize their counterparty risk, but this insurance may weaken incentives to acquire and to reveal information about such risk. When considering this trade-off, participants would choose central clearing if information acquisition is incentive compatible. If it is not, they may prefer bilateral clearing, when this choice prevents strategic default while economizing on costly collateral. In either case, participants independently choose the efficient clearing arrangement. Consequently, central clearing can be socially inefficient under certain circumstances. These results stand in contrast to those in Achary and Bisin (2014), who find that central clearing is always the optimal clearing arrangement.

Keywords: Central counterparties; Collateral; Limited commitment (search for similar items in EconPapers)
JEL-codes: G10 G14 G20 G23 (search for similar items in EconPapers)
Date: 2018-03-08
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