The Emergence and Future of Central Counterparties

Thorsten V. Koeppl
Cyril Monnet
Publication Type: 
Working Papers
Publication Article File: 
Publication Year: 
2010

We explain why central counterparties (CCPs) emerged historically. With standardized contracts, it is optimal to insure counterparty risk by clearing those contracts through a CCP that uses novation and mutualization. As netting is not essential for these services, it does not explain why CCPs exist. In over-the-counter markets, as contracts are customized and not fungible, a CCP cannot fully guarantee contract performance. Still, a CCP can help: As bargaining leads to an inefficient allocation of default risk relative to the gains from customization, a transfer scheme is needed. A CCP can implement it by offering partial insurance for customized contracts.

This paper was presented at the Optimal Design of Payments Systems Workshop in May of 2011.

JEL Codes: 
G2, G13, D15, D82
Region: 
Global
Country: 
Global
Topic: 
Financial Institutions
Topic: 
Risk
Topic: 
Payments Systems