Central Clearing and the Sizing of Default Funds

• DOI: 10.2139/ssrn.3290397
• Publication Date: 2018-12-05T11:31:15Z
• Authors: Agostino Capponi; Jessie Jiaxu Wang; Hongzhong Zhang
• Keywords: Clearing

This paper develops a framework for designing collateral requirements in centrally cleared market. Clearing members post collateral—initial margins and default funds—to increase their pledgeable income, thereby committing to risk management. The two types of collateral, however, are not perfect substitutes. By achieving loss mutualization, funds economically more efficient than initial aligning members' incentives management ex ante. optimal mix resources balances the efficiency providing with relative opportunity costs. Our model predicts increased use under stringent capital requirements, distressed market scenarios.