Optimal Clearinghouse Collateral Requirements

50 Pages Posted: 5 Oct 2015 Last revised: 28 Nov 2016

Agostino Capponi

Columbia University

W. Allen Cheng

Columbia University - Department of Industrial Engineering and Operations Research (IEOR)

Date Written: March 11, 2016

Abstract

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

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

Agostino Capponi (Contact Author)

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Wan-Schwin Allen Cheng

Columbia University - Department of Industrial Engineering and Operations Research (IEOR) ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

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