Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/67808 
Year of Publication: 
2010
Series/Report no.: 
Queen's Economics Department Working Paper No. 1241
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
Abstract: 
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.
Subjects: 
Counterparty Risk
Novation
Mutualization
Over-the-counter Markets
Customized Financial Contracts
JEL: 
G2
G13
D53
D82
Document Type: 
Working Paper

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