50 Pages Posted: 5 Oct 2015 Last revised: 28 Nov 2016
Date Written: March 11, 2016
We introduce a framework that relates clearinghouse collateral levels to market fundamentals. The profit-maximizing clearinghouse, who provides trade matching and clearing services, chooses the fee and collateral level per traded contract. Collateral is then posted by heterogeneous traders who may default. Increasing collateral levels introduces a trade-off between higher protection from defaults and reduced revenues due to lower trading activity.
We show that, consistent with intuition, equilibrium collateral levels increase with market riskiness. In addition, our model predicts that the clearing fee increases with market riskiness and funding cost, while
collateral decreases with funding cost. In a model extension, we separate matching and clearing services by introducing an exchange, and analyze the implications of the different market structure on the resulting equilibria.
Keywords: Collateralized Trading, Central Clearing
JEL Classification: G21, G28
Suggested Citation: Suggested Citation
Capponi, Agostino and Cheng, W. Allen, Optimal Clearinghouse Collateral Requirements (March 11, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2669304 or http://dx.doi.org/10.2139/ssrn.2669304