Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/43277 
Year of Publication: 
2008
Series/Report no.: 
CFS Working Paper No. 2008/42
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
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.
Subjects: 
Central Counterparty
Clearing
Default
Collateral
Risk Management
JEL: 
G20
G30
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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