Systemic Risk and Optimal Fee Structure for Central Clearing Counterparty Under Partial Netting

23 Pages Posted: 28 Oct 2016 Last revised: 18 Jan 2018

See all articles by Zhenyu Cui

Zhenyu Cui

Stevens Institute of Technology - School of Business

Qi Feng

University of Connecticut

Ruimeng Hu

University of California, Santa Barbara (UCSB)

Bin Zou

University of Connecticut - Department of Mathematics

Date Written: October 28, 2016

Abstract

We propose a novel central clearing counterparty (CCP) design for a financial network with multilateral clearing, where the participation rate of individual banks depends on the volume-based fee charged by the CCP. We introduce a general demand function for the individual banks’ partici- pation rate, and seek the optimal fee that maximizes the net worth of the CCP. The optimal fee is explicitly solved for the case of a quadratic demand function. We show that partial participation of banks in the CCP at the optimal fee rate reduces banks’ aggregate shortfall in the financial network and also reduces the overall systemic risk. This result justifies the alignment of interests of the profitable aspect and the regulatory aspect of the CCP. Furthermore, we carry out numerical examples to verify the theoretical results.

Keywords: Clearing Counterparty (CCP), Clearing Fee, Optimization, Shortfall, Systemic Risk

JEL Classification: D85, C61, G21

Suggested Citation

Cui, Zhenyu and Feng, Qi and Hu, Ruimeng and Zou, Bin, Systemic Risk and Optimal Fee Structure for Central Clearing Counterparty Under Partial Netting (October 28, 2016). Available at SSRN: https://ssrn.com/abstract=2860702 or http://dx.doi.org/10.2139/ssrn.2860702

Zhenyu Cui (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://sites.google.com/site/zhenyucui86/publications

Qi Feng

University of Connecticut ( email )

Storrs, CT 06269-1063
United States

Ruimeng Hu

University of California, Santa Barbara (UCSB) ( email )

South Hall 5504
Santa Barbara, CA 93106
United States

Bin Zou

University of Connecticut - Department of Mathematics ( email )

341 Mansfield Road U1009
Department of Mathematics
Storrs, CT 06269-1069
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
203
Abstract Views
2,027
Rank
271,062
PlumX Metrics