Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148111
Authors: 
Raykov, Radoslav S.
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-4
Abstract: 
This paper studies how the allocation of residual losses affects trading and welfare in a central counterparty. I compare loss sharing under two loss-allocation mechanisms - variation margin haircutting and cash calls - and study the privately and socially optimal degree of loss sharing. For losses allocated using variation margin haircuts, I find that trading volume is sensitive to the degree of loss sharing and to the risk sensitivity of skinin-the-game capital. By contrast, for cash calls, the degree of loss sharing does not affect trading volume but instead affects the chance that a cash call is honoured, which can constrain the recovery of funds. A welfare analysis characterizes the market outcome and compares it with the social optimum.
Subjects: 
Economic models
Payment clearing and settlement systems
JEL: 
G19
G21
Document Type: 
Working Paper

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