For-profit CCPs may not hold socially optimal capital – BIS paper
“For-profit CCPs have incentives that are misaligned with financial stability,” author says
For-profit central counterparties (CCPs) may choose to hold levels of capital that are lower than the socially optimum, leaving themselves vulnerable to crises, according to research published by the Bank for International Settlements.
Wenqian Huang notes in the working paper that the collapse of a CCP is not merely hypothetical: several failed in the 1970s and 1980s, while a single trader’s default in 2018 wiped out two-thirds of Nasdaq Clearing’s default fund, a CCP that is deemed
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