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- Title
The Design of a Central Counterparty.
- Authors
Kuong, John Chi-Fong; Maurin, Vincent
- 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.
- Subjects
COUNTERPARTY risk; COLLATERAL security; COST; DEFAULT (Finance); OVER-the-counter markets; ECONOMIC forecasting; PROFIT &; loss; RISK aversion
- Publication
Journal of Financial & Quantitative Analysis, 2024, Vol 59, Issue 3, p1257
- ISSN
0022-1090
- Publication type
Article
- DOI
10.1017/S0022109023000121