Transparency and Collateral: Central Versus Bilateral Clearing

73 Pages Posted: 12 Mar 2018 Last revised: 29 Apr 2020

See all articles by Gaetano Antinolfi

Gaetano Antinolfi

Washington University in St. Louis - Department of Economics

Francesca Carapella

Board of Governors of the Federal Reserve System

Francesco Carli

CATÓLICA-LISBON School of Business & Economics

Date Written: 2018-03-08

Abstract

Bilateral financial contracts typically require an assessment of counterparty risk. Central clearing of these financial contracts allows market participants to mutualize their counterparty risk, but this insurance may weaken incentives to acquire and to reveal information about such risk. When considering this trade-off, participants would choose central clearing if information acquisition is incentive compatible. If it is not, they may prefer bilateral clearing, when this choice prevents strategic default while economizing on costly collateral. In either case, participants independently choose the efficient clearing arrangement. Consequently, central clearing can be socially inefficient under certain circumstances. These results stand in contrast to those in Achary and Bisin (2014), who find that central clearing is always the optimal clearing arrangement.

Keywords: Central counterparties, Collateral, Limited commitment

JEL Classification: G10, G14, G20, G23

Suggested Citation

Antinolfi, Gaetano and Carapella, Francesca and Carli, Francesco, Transparency and Collateral: Central Versus Bilateral Clearing (2018-03-08). FEDS Working Paper No. 2018-017, Available at SSRN: https://ssrn.com/abstract=3137995 or http://dx.doi.org/10.17016/FEDS.2018.017

Gaetano Antinolfi (Contact Author)

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-7335 (Phone)
314-935-4156 (Fax)

Francesca Carapella

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Francesco Carli

CATÓLICA-LISBON School of Business & Economics ( email )

Palma de Cima
Lisbon, Lisboa 1649-023
Portugal

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