Central clearing margin
Albert J. MenkveldVU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA); Duisenberg School of Finance
Systemic liquidation risk arises when too many financial intermediaries/arbitrageurs default at the same time. This might happen when they all bet on the same side of a single risk factor. The bet gets crowded. A central counterparty (CCP) is well-positioned to mitigate such risk as it observes all outstanding bets. A model is proposed to aid a welfare-maximizing CCP who considers trade-based margins to steer arriving arbitrageurs away from crowded bets. The CCP needs to maintain a default fund large enough to remain solvent. Perhaps the most surprising result is that such CCP could prefer non-symmetry i.e., crowding, over symmetry in a perfectly symmetric economy.
Number of Pages in PDF File: 60
Keywords: systemic risk, centralized clearing, margin, default fund
JEL Classification: G20working papers series