Koeppl & Monnet - CCPs

8/6/2019 Koeppl & Monnet - CCPs

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Center for Financial Studies

Goethe-Universität Frankfurt House of Finance

Grüneburgplatz 1 60323 Frankfurt Deutschland

No. 2008/42

Central Counterparties

Thorsten V. Koeppl and Cyril Monnet

Telefon: +49 (0)69 798-30050

Fax: +49 (0)69 798-30077

http://www.ifk-cfs.de E-Mail: [email protected]




House of Finance Goethe-Universität

Grüneburgplatz 1 60323 Frankfurt am Main Deutschland


The Center for Financial Studies is a nonprofit research organization, supported by an

association of more than 120 banks, insurance companies, industrial corporations and

public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia.

The CFS Working Paper Series presents the result of scientific research on selected

topics in the field of money, banking and finance. The authors were either participants

in the Center´s Research Fellow Program or members of one of the Center´s Research

Projects.

If you would like to know more about the Center for Financial Studies, please let us

know of your interest.

Prof. Dr. Jan Pieter Krahnen Prof. Volker Wieland, Ph.D.

Telefon: +49 (0)69 798-30050

Fax: +49 (0)69 798-30077

http://www.ifk-cfs.de E-Mail: [email protected]



* We are grateful for comments from Charlie Kahn, Jean-Charles Rochet and Jens Tapking and seminar participants at the Bank of

England, the Cass Business School, the CEA meetings, the Bank of Canada, the Econometric Society Meetings, the SED meetings and

the CEPR conference on Competition and Efficiency in Payment and Security Settlement Systems. Furthermore, we thank the Financial

Markets Infrastructure Division at the Bank of England for their hospitality where some of this research was initiated. The usualdisclaimers apply.

1 Queen.s University, Department of Economics Kingston, Ontario, K7L 3N6; e-mial: [email protected]

2 Federal Reserve Bank of Philadelphia, Research Department, Ten Independence Mall Philadelphia, PA 19106-1574; e-mail:

[email protected]

CFS Working Paper No. 2008/42

Central Counterparties*

Thorsten V. Koeppl1

and Cyril Monnet2

May 28, 2008

Abstract:

Central counterparties (CCPs) have increasingly become a cornerstone of financial markets

infrastructure. We present a model where trades are time-critical, liquidity is limited and there

is limited enforcement of trades. We show a CCP novating trades implements efficient trading

behaviour. It is optimal for the CCP to face default losses to achieve the efficient level of

trade. To cover these losses, the CCP optimally uses margin calls, and, as the default problem

becomes more severe, also requires default funds and then imposes position limits .

JEL Classification: G20, G30.

Keywords: Central Counterparty; Clearing; Default; Collateral; Risk Management.



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CFS Working Paper Series:

No. Author(s) Title

2008/41 Terrence Hendershott

Charles M. Jones

Albert J. Menkveld

Does Algorithmic Trading Improve Liquidity?

2008/40 Jonathan Field

Jeremy Large

Pro-Rata Matching and One-Tick Futures Markets

2008/39 Giovanni Cespa

Thierry Foucault

Insiders-Outsiders, Transparency and the Value of

the Ticker

2008/38 Rachel J. Huang

Alexander Muermann

Larry Y. Tzeng

Hidden Regret in Insurance Markets: Adverse and

Advantageous Selection

2008/37 Alexander Muermann

Stephen H. Shore

Monopoly Power Limits Hedging

2008/36 Roman Inderst Retail Finance: Bringing in the Supply Side

2008/35 Dimitris Christelis

Tullio Jappelli

Mario Padula

Cognitive Abilities and Portfolio Choice

2008/34 Tullio Jappelli

Marco Pagano

Information Sharing and Credit: Firm-Level

Evidence from Transition Countries

2008/33 Tullio Jappelli

Marco Pagano

Financial Market Integration under EMU

2008/32 Fancis X. Diebold

Georg H. Strasser

On the Correlation Structure of Microstructure

Noise in Theory and Practice

Copies of working papers can be downloaded at http://www.ifk-cfs.de

Documents

Koeppl & Monnet - CCPs