Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97463
Authors: 
Koeppl, Thorsten V.
Year of Publication: 
2013
Series/Report no.: 
Queen's Economics Department Working Paper 1312
Abstract: 
Can central counterparty (CCP) clearing control counterparty risk in the presence of risk taking that can aggravate such risk? When counterparty risk is not observable, I show that central clearing leads to higher collateral requirements for two different reasons. Without collusion about risk taking, a CCP offering diversification of risk cannot selectively forgo incentives for transactions that use collateral only for insurance. With collusion about risk taking, a CCP needs to charge collateral in line with the worst counterparty quality to control risk taking. Requiring more collateral reduces market liquidity and worsens incentives causing a feedback effect that amplifies collateral costs.
Subjects: 
CCP Clearing
Counterparty Risk
Moral Hazard
Collateral
Market Liquidity
JEL: 
G32
G38
D82
D83
Document Type: 
Working Paper

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