Abstract
Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007-2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies, which along with classical studies are surveyed in this article. For example, multilateral netting, the insurance against counterparty risk, the effect of CCPs on asset prices and fire sales, margins setting, the default waterfall, and CCP governance are discussed here. We review both CCP theory and empirical work and conclude by discussing regulatory issues.
| Original language | English |
|---|---|
| Pages (from-to) | 153-178 |
| Number of pages | 26 |
| Journal | Annual Review of Financial Economics |
| Volume | 13 |
| DOIs | |
| Publication status | Published - Nov 2021 |
Bibliographical note
Funding Information:7. The regulation of CCPs is nontrivial. Network externalities create a role for regulators to coordinate investors on a socially desirable equilibrium. However, CCPs are systemic in nature because they absorb all counterparty risk in securities markets. This feature creates a need for regulatory oversight and, potentially, for financial support, which in turn creates moral hazard.
Publisher Copyright:
© 2021 Annual Reviews Inc.. All rights reserved.
Funding
7. The regulation of CCPs is nontrivial. Network externalities create a role for regulators to coordinate investors on a socially desirable equilibrium. However, CCPs are systemic in nature because they absorb all counterparty risk in securities markets. This feature creates a need for regulatory oversight and, potentially, for financial support, which in turn creates moral hazard.
Keywords
- Central clearing
- Counterparty risk
- Default waterfall
- Margin
