Systemic Risk and Central Clearing Counterparty Design

46 Pages Posted: 9 Jun 2013 Last revised: 1 Mar 2017

Hamed Amini

Ecole Polytechnique Fédérale de Lausanne

Damir Filipović

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Andreea Minca

Cornell University

Date Written: September 3, 2015

Abstract

We examine the effects on a financial network of multilateral clearing via a central clearing counterparty (CCP) from an ex ante and ex post perspective. The CCP is capitalized with equity and a guarantee fund and it can charge a volume-based fee. We propose a CCP design which improves aggregate surplus, and reduces banks' liquidation and shortfall losses. We characterize the CCP's equity, fee and guarantee fund policies that reduce systemic risk and are incentive compatible for banks. A simulation study based on aggregate market data shows that central counterparty clearing can reduce systemic risk and improve banks' utility.

Keywords: Over the Counter Markets, Central Counterparty Clearing, Market Design, Financial Network, Contagion, Systemic Risk, Credit Default Swap Markets

JEL Classification: C44, C54, C62, G01, G18, G32

Suggested Citation

Amini, Hamed and Filipović, Damir and Minca, Andreea, Systemic Risk and Central Clearing Counterparty Design (September 3, 2015). Swiss Finance Institute Research Paper No. 13-34. Available at SSRN: https://ssrn.com/abstract=2275376 or http://dx.doi.org/10.2139/ssrn.2275376

Hamed Amini

Ecole Polytechnique Fédérale de Lausanne ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

Damir Filipovic (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/damir.filipovic

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Andreea Minca

Cornell University ( email )

222 Rhodes Hall
Ithaca, NY NY 14853
United States

HOME PAGE: http://people.orie.cornell.edu/acm299/

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