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Transparency and collateral: central versus bilateral clearing

journal contribution
posted on 2018-03-01, 00:00 authored by Gaetano Antinolfi, Francesca Carapella, Francesco CarliFrancesco Carli
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.

History

Journal

Finance and Economics Discussion Series

Volume

2018

Issue

017

Pagination

1 - 72

Publisher

Board of Governors of the Federal Reserve System

Location

Washington, D.C.

ISSN

1936-2854

Language

eng

Publication classification

C3.1 Non-refereed articles in a professional journal

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