Survey_KM_2008

Abstract

We develop a simple model of exchange, where common trading frictions prevent investots to trade efficiently. We show that a CCP is a natural device to implement the efficient level of trade. The model features investors with a random need to trade a security. The structure of markets and preferences of traders are such that trades have to be carried out by a specific time, trades cannot be fully and immediately settled at that time and traders have an opportunity to renege on their obligations. We show that these elements impose severe limitations on a delivery-vs.-payment (DvP) mechanism which can lead to welfare loss. We then introduce a CCP as a technology that can hold collateral and can commit to its promises. As such the CCP ist the ideal counterparty and it arises endogenously in response the trading imperfections. The model is static with three subperiods and a unit measure of investors. There are two assets - cash and securities - in positve supply.