@article{563a4017628e49009e7c0c6e828e83c5,
title = "A Theory of Collateral Requirements for Central Counterparties",
abstract = "This paper develops a framework for designing collateral requirements in a 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, default funds are economically more efficient than initial margins in aligning members{\textquoteright} incentives for risk management ex ante. The optimal mix of collateral resources balances the efficiency in providing incentives with their relative opportunity costs. Our model predicts increased use of initial margins under stringent capital requirements and of default funds under distressed market scenarios.",
keywords = "central counterparty, collateral, default funds, initial margins, macro-prudential policy",
author = "Wang, {Jessie Jiaxu} and Agostino Capponi and Hongzhong Zhang",
note = "Funding Information: The research of A. Capponi has been supported by the National Science Foundation-CMMI [1752326 CAREER Grant]. The authors thank the editors, three anonymous referees, Alejandro Bernales, Bruno Biais, Jean-Edouard Colliard, Felix Corell, Denis Gromb, Yunzhi Hu, Wenqian Huang, Bryan Lim, David Murphy, Matthew Pritsker, Radoslav Raykov, Mark Seasholes, Yuri Tserlukevich, Dimitri Vayanos, Guillaume Vuillemey, Yesha Yadav, Liyan Yang, Haoxiang Zhu, and participants at the 2018 Stern Microstructure Meeting, 2019 Finance Down Under Conference, 2019 Conference on Developments in Alternative Finance, 2019 Non-Bank Financial Institutions and Financial Stability Conference at London School of Economics, 2020 Australasian Finance and Banking Conference, 2021 American Finance Association annual meeting, HEC Paris, Arizona State University, Office of Financial Research, and the Securities and Exchange Commission for helpful comments. The research of H. Zhang was completed when he was an associate research scientist in the Department of Industrial Engineering and Operations Research at Columbia University. Funding Information: History: Accepted by David Simchi-Levi, finance. Funding: The research of A. Capponi has been supported by the National Science Foundation-CMMI [1752326 CAREER Grant]. Supplemental Material: Data files and the online appendix are available at https://doi.org/10.1287/mnsc. 2021.4145. Publisher Copyright: Copyright {\textcopyright} 2022, INFORMS.",
year = "2022",
month = sep,
doi = "10.1287/mnsc.2021.4145",
language = "English (US)",
volume = "68",
pages = "6993--7017",
journal = "Management Science",
issn = "0025-1909",
publisher = "INFORMS Inst.for Operations Res.and the Management Sciences",
number = "9",
}