Clearing, counterparty risk and aggregate risk

Arbeitspapier

We study the optimal design of clearing systems. We analyze how counterparty risk should be allocated, whether traders should be fully insured against that risk, and how moral hazard affects the optimal allocation of risk. The main advantage of centralized clearing, as opposed to no or decentralized clearing, is the mutualization of risk. While mutualization fully insures idiosyncratic risk, it cannot provide insurance against aggregate risk. When the latter is significant, it is efficient that protection buyers exert effort to find robust counterparties, whose low default risk makes it possible for the clearing system to withstand aggregate shocks. When this effort is unobservable, incentive compatibility requires that protection buyers retain some exposure to counterparty risk even with centralized clearing.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1481

Classification and Topics

• Classification: Wirtschaft ; Insurance; Insurance Companies; Actuarial Studies ; Financial Institutions and Services: Government Policy and Regulation ; Asymmetric and Private Information; Mechanism Design
• Subject: aggregate and idiosyncratic risk ; central clearing counterparty ; Counterparty risk ; Moral Hazard ; mutualization ; optimal contracting ; Risk-sharing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Biais, Bruno ; Heider, Florian ; Hoerova, Marie
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/153914
• Last update: 10.03.2025, 11:43 AM CET