We examine the effects on a financial network of multilateral clearing via a central clearing counterparty (CCP) from an ex ante and ex post perspective. The CCP is capitalized with equity and a guarantee fund and it can charge a volume-based fee. We propose a CCP design which improves aggregate surplus, and reduces banks' liquidation and shortfall losses. We characterize the CCP's equity, fee and guarantee fund policies that reduce systemic risk and are incentive compatible for banks. A simulation study based on aggregate market data shows that central counterparty clearing can reduce systemic risk and improve banks' utility.
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