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Center for Financial Studies
Goethe-Universität Frankfurt House of Finance
Grüneburgplatz 1 60323 Frankfurt Deutschland
No. 2008/42
Central Counterparties
Thorsten V. Koeppl and Cyril Monnet
Telefon: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
http://www.ifk-cfs.de E-Mail: [email protected]
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Center for Financial Studies
House of Finance Goethe-Universität
Grüneburgplatz 1 60323 Frankfurt am Main Deutschland
Center for Financial Studies
The Center for Financial Studies is a nonprofit research organization, supported by an
association of more than 120 banks, insurance companies, industrial corporations and
public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia.
The CFS Working Paper Series presents the result of scientific research on selected
topics in the field of money, banking and finance. The authors were either participants
in the Center´s Research Fellow Program or members of one of the Center´s Research
Projects.
If you would like to know more about the Center for Financial Studies, please let us
know of your interest.
Prof. Dr. Jan Pieter Krahnen Prof. Volker Wieland, Ph.D.
Telefon: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
http://www.ifk-cfs.de E-Mail: [email protected]
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* We are grateful for comments from Charlie Kahn, Jean-Charles Rochet and Jens Tapking and seminar participants at the Bank of
England, the Cass Business School, the CEA meetings, the Bank of Canada, the Econometric Society Meetings, the SED meetings and
the CEPR conference on Competition and Efficiency in Payment and Security Settlement Systems. Furthermore, we thank the Financial
Markets Infrastructure Division at the Bank of England for their hospitality where some of this research was initiated. The usualdisclaimers apply.
1 Queen.s University, Department of Economics Kingston, Ontario, K7L 3N6; e-mial: [email protected]
2 Federal Reserve Bank of Philadelphia, Research Department, Ten Independence Mall Philadelphia, PA 19106-1574; e-mail:
CFS Working Paper No. 2008/42
Central Counterparties*
Thorsten V. Koeppl1
and Cyril Monnet2
May 28, 2008
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 .
JEL Classification: G20, G30.
Keywords: Central Counterparty; Clearing; Default; Collateral; Risk Management.
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CFS Working Paper Series:
No. Author(s) Title
2008/41 Terrence Hendershott
Charles M. Jones
Albert J. Menkveld
Does Algorithmic Trading Improve Liquidity?
2008/40 Jonathan Field
Jeremy Large
Pro-Rata Matching and One-Tick Futures Markets
2008/39 Giovanni Cespa
Thierry Foucault
Insiders-Outsiders, Transparency and the Value of
the Ticker
2008/38 Rachel J. Huang
Alexander Muermann
Larry Y. Tzeng
Hidden Regret in Insurance Markets: Adverse and
Advantageous Selection
2008/37 Alexander Muermann
Stephen H. Shore
Monopoly Power Limits Hedging
2008/36 Roman Inderst Retail Finance: Bringing in the Supply Side
2008/35 Dimitris Christelis
Tullio Jappelli
Mario Padula
Cognitive Abilities and Portfolio Choice
2008/34 Tullio Jappelli
Marco Pagano
Information Sharing and Credit: Firm-Level
Evidence from Transition Countries
2008/33 Tullio Jappelli
Marco Pagano
Financial Market Integration under EMU
2008/32 Fancis X. Diebold
Georg H. Strasser
On the Correlation Structure of Microstructure
Noise in Theory and Practice
Copies of working papers can be downloaded at http://www.ifk-cfs.de