Modeling Central Counterparty in Determining Optimal Margin Requirements

In this study, we propose a method for modeling the central counterparty’s optimization problem describing the actual behavior of its margin requirement. Thus far, the central counterparty’s problems as a profit-making company and social planner have been addressed. We construct both optimization problems and solve the optimal margin requirements. The formulae for the optimal margin requirements demonstrate that the margin requirement depends on the clearing fee in the profit-making company model and on the members’ cost of capital in the social welfare model. Calibrating the model parameters from the actual margin requirement data demonstrates how the optimization problem describes the actual central counterparty’s behavior in the margin requirement. The calibration results show that the profit-making model is superior to the social planner model in describing the actual margin requirement. The profitmaking model is more accurate than a simple linear regression model