Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153914
Authors: 
Biais, Bruno
Heider, Florian
Hoerova, Marie
Year of Publication: 
2012
Series/Report no.: 
ECB Working Paper 1481
Abstract: 
We study the optimal design of clearing systems. We analyze how counterparty risk should be allocated, whether traders should be fully insured against that risk, and how moral hazard affects the optimal allocation of risk. The main advantage of centralized clearing, as opposed to no or decentralized clearing, is the mutualization of risk. While mutualization fully insures idiosyncratic risk, it cannot provide insurance against aggregate risk. When the latter is significant, it is efficient that protection buyers exert effort to find robust counterparties, whose low default risk makes it possible for the clearing system to withstand aggregate shocks. When this effort is unobservable, incentive compatibility requires that protection buyers retain some exposure to counterparty risk even with centralized clearing.
Subjects: 
aggregate and idiosyncratic risk
central clearing counterparty
Counterparty risk
Moral Hazard
mutualization
optimal contracting
Risk-sharing
JEL: 
G22
G28
D82
Document Type: 
Working Paper

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