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The Design of a Central Counterparty
Resource type
Authors/contributors
- Kuong, John Chi-Fong (Author)
- Maurin, Vincent (Author)
Title
The Design of a Central Counterparty
Abstract
This article analyzes the optimal allocation of losses via a Central Clearing Counterparty (CCP) in the presence of counterparty risk. A CCP can hedge this risk by mutualizing losses among its members. This protection, however, weakens members’ incentives to manage counterparty risk. Delegating members’ risk monitoring to the CCP alleviates this tension in large markets. To discipline the CCP at minimum cost, members offer the CCP a junior tranche and demand capital contribution. Our results endogenize key layers of the default waterfall and deliver novel predictions on its composition, collateral requirements, and CCP ownership structure.
Publication
Journal of Financial and Quantitative Analysis
Volume
59
Issue
3
Pages
1257-1299
Date
2024/05
Language
en
ISSN
0022-1090, 1756-6916
Accessed
6/17/24, 9:36 AM
Library Catalog
Cambridge University Press
Citation
Kuong, J. C.-F., & Maurin, V. (2024). The Design of a Central Counterparty. Journal of Financial and Quantitative Analysis, 59, 1257–1299.
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