Motivation

• Mandatory CCPs since 2008-09 crisis
• Boom in CCP literature since then
  - Our survey covers 124 papers
  - Of these, 88 papers appeared after 2009
• CCP issues regularly resurface since then - Near failure in 2018: Nasdaq Clearing (electricity futures, Einar Aas, ~68% default fund)
  - Central clearing US treasuries (netting eff. ~$330 billion, 60%, Fleming and Keane, NY Fed 2021)
  - Margin breaches during COVID-19 crisis

Margin breaches

Margin breaches

Theory

• Modigliani-Miller theorem: No role for CCPs - No role for CCPs: They are just splitting cash flows
  - Need explicit friction to justify CCPs
• Benefits
  • CCPs insure against counterparty risk - CCPs pool and diversify idiosyncratic counterparty risk
    - Margins serve as deductibles (adv. selection/moral hazard)
  • CCPs create multilateral netting efficiencies
  • CCPs mitigate fire sales
    - Low prices due to adverse selection or capital constraints
    - Auctions run by CCPs can mitigate price discounts
• Costs
  • CCPs might create moral hazard
  • CCPs create systemic risk

Empirics

• CCPs and asset prices
  - CCPs reduce volatility and pricing of counterparty risk
  - Both historical and recent evidence
• CCPs and trading in underlying assets - First derivatives CCP boosted trade flows
• CCPs and fire sale mitigation
  - Historical evidence
  - Anecdotal evidence from Lehman

CCP Design

Nokia: April 22, 2010

CCP Design

• Measure of CCP exposure to its members: ExpCCP Menkveld (RAPS, 2017), VaR extension of Duffie and Zhu (RAPS, 2011)
  

Design of CCPs

• Design of margins
  - Crowded positions
  - Design of stress tests
• Default waterfall and resolution - Insights about the role of each waterfall resource
  - Lack of contracting models with optimal waterfalls
• Governance of CCPs
  - Member-owned CCPs?
  - Governance of member-owned utilities understudied
• Number of CCPs
  - Costs of multiple CCPs: Fragmentation and CCP basis
  - Benefits in terms of financial stability?

Regulation

• Benefits of mandatory CCPs - Coordination failures arising from network externalities
  - Traders do not raise enough collateral bilaterally
  - Inability to observe all of a counterparty's other positions
• Costs of mandatory CCPs: Moral hazard - CCPs now have captive clienteles
  - CCP members have lower incentives to monitor counterparty risk
  - Too big to fail?
• Regulation of CCPs?
  - Capital requirements?
  - Other risk management constraints?
  - Role of central bank access?

Open questions

• Industrial organization of central clearing - How do CCPs compete?
  - Become a CCP member or use client clearing at an existing CCP member?
  - Interoperability?
• How do CCPs invest their collateral?
  - Does it affect other markets?
  - For example, does it create risks?
• CCPs in the broader market environment - Should CCPs be introduced elsewhere?
  - How does the added value of a CCPs depend on traded contract?