Central Counterparty Capitalization and Misaligned Incentives
54 Pages Posted: 19 Dec 2016
Date Written: December 14, 2016
Central Counterparties (CCPs) are systemic nodes in financial markets. Incentive regulation on CCPs becomes crucial for financial stability. I investigate incentives and optimal regulation of a profit-driven CCP with limited liability. Conditional on available capital, the CCP fine-tunes collateral requirements to balance fee incomes against counterparty risk. High collateral reduces potential default losses, but leads to foregone profitable trades. Limited liability creates a wedge between the CCP’s collateral policy and the socially optimal solution to this trade-off. However, regulators can use capital requirements to close the wedge, unless clearing fee exceeds a threshold.
Keywords: Central Counterparties (CCPs), Capital Requirement, Collateral
JEL Classification: G01, G12, G21, G22
Suggested Citation: Suggested Citation