Contracting Innovations and the Evolution of Clearing and Settlement Methods at Futures Exchanges

Abstract

Vilarin provided valuable research assistance. Bernie Flores tracked down many obscure references. The analysis and conclusions of this paper the author's and do not suggest concurrence by the Federal Reserve Bank of Chicago. Contracting Innovations and the Evolution of Clearing and Settlement Methods atFutures Exchanges

CCPs and network stability in OTC derivatives markets

“…The systemic importance of CCPs has long been acknowledged (Bernanke 1990;Moser 1998;Kroszner 2006). However, the G20-led initiative to expand the scope of CCP clearing to OTC derivative markets (G20 2009) has moved the resilience of CCPs higher up the international regulatory policy agenda.…”

The Topology of Central Counterparty Clearing Networks and Network Stability

“…In this bilateral market, A and B need to deal directly with each other and make their own arrangements for all post-trade services. Such a pre-settlement arrangement is known as a direct (or bilateral) clearing arrangement (see Moser [23] for details). The lower panel shows what happens when novation by a CCP is introduced.…”

“…G is the number of GCMs, K m * is the minimizer (optimal) value in (12), D M (K m * ) is the minimum distance, F is the level of tiering presented in (14), C is the level of concentration presented in (15), and MEaR is the Maximum-Exposure-at-Risk presented in (16) example, a smaller concentration coefficient means that the GCMs have roughly the same number of clients; whereas a larger concentration coefficient means that most of the clients are cleared through the same GCM. 23 In order to examine the relation between the rate function and tiering and concentration, we consider a central clearing network of 10 participants, where there is one CCP. For each possible network topology (i.e., different ways of having 9 − G clients clear through G GCMs, where G is allowed to vary), we compute the tiering and concentration coefficients and the rate function of (12).…”

The Crash of 1882 and the Bailout of the Paris Bourse

“…This counterparty risk is a significant problem for forward and futures markets, and the bankruptcy of one broker can yield large and extensive losses to others. For example, the failure of one member of the Chicago Board of Trade in 1902 led to some losses for 42% of the members (Moser 1998). The high volume and rapid speed of the verbal market on the parquet required customers and brokers to be certain that their orders would be completed.…”

“…In the U.S. the Minneapolis Grain Exchange was the first to employ this system in 1891. It only adopted by the Chicago Board of Trade in 1925 (Moser 1998). 13 See the Assemblé es Gé né rales Rapports 1852, p. 80 where the founding of the caisse commune is discussed at the time it was reorganized on June 17, 1852.…”