Reforming the OTC derivatives market
Remarks at the Harvard Law School's Symposium on Building the Financial System of the 21st Century, Armonk, New York.
Title II resolution, a useful tool but not a panacea
Remarks at 2013 Resolution Conference: Planning for the Orderly Resolution of a Global Systemically Important Bank, Washington, D.C.
Frictional Intermediation in Over-the-Counter Markets
We extend Duffie, G?arleanu, and Pedersen?s (2005) search theoretic model of over-the-counter (OTC) asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers? valuations or inventory costs. We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theoretical formulas for key statistics analyzed in empirical studies of the intermediation process in OTC markets. A calibration to the market for municipal securities reveals that the model can generate trading patterns and prices that are ...
The emergence and future of central counterparties
The authors explain why central counterparties (CCPs) emerged historically. With standardized contracts, it is optimal to insure counterparty risk by clearing those contracts through a CCP that uses novation and mutualization. As netting is not essential for these services, it does not explain why CCPs exist. In over-the-counter markets, as contracts are customized and not fungible, a CCP cannot fully guarantee contract performance. Still, a CCP can help: As bargaining leads to an inefficient allocation of default risk relative to the gains from customization, a transfer scheme is needed. A ...
An Information-Based Theory of Financial Intermediation
We advance a theory of how private information and heterogeneous screening ability across market participants shapes trade in decentralized asset markets. We solve for the equilibrium market structure and show that the investors who intermediate trade the most and interact with the largest set of counterparties must have the highest screening ability. That is, the primary intermediaries are those with superior information?screening experts. We provide empirical support for the model?s predictions using transaction-level micro data and information disclosure requirements. Finally, we study the ...
The role of regulation in system stability
Regulatory reforms to reduce financial fragility
On the credit risk of OTC derivative users