Systemic Risk in Real Time: A Risk Dashboard for Central Clearing Parties (CCPs)

Huang, Wenqian; Menkveld, Albert J.; Yu, Shihao

doi:10.2139/ssrn.2886167

“…A separate literature studies the amount of margins necessary to safely clear derivatives. See, for example,Duffie, Scheicher, and Vuillemey (2015),Cruz Lopez, Hurlin, Harris, and Pérignon (2016),Huang and Menkveld (2016) andMenkveld (2017).…”

mentioning

confidence: 99%

The Failure of a Clearinghouse: Empirical Evidence

Bignon

¹

,

Vuillemey

²

2016

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We provide the first detailed empirical analysis of the failure of a derivatives clearinghouse: the Caisse de Liquidation, which defaulted in Paris in 1974. Using archival data, we find three main causes of the failure: (i) a weak pool of investors, (ii) the inability to contain the growth of a large member position, and (iii) risk-shifting decisions by the clearinghouse. Risk-shifting incentives aligned the clearinghouse's interests with those of the defaulting member, induced delays in the liquidation of the defaulted position, and led private renegotiation attempts to fail. Our results have implications for the design of clearing institutions. 3

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“…First, while prior studies have looked at headline margin requirements for individual securities (Figlewski (1984), Gay et al (1986), Hedegaard (2014)), their approaches are less applicable in the modern setting of portfolio margining, where margins are set at the portfolio level rather than for individual contracts (as in the case of CDS clearinghouses). Our disaggregated, granular CDS data provide a valuable source of information for analyzing portfolio-level collateral requirements and the associated systemic risk implications (Huang and Menkveld (2016)). Second, we consider a market where payoffs are highly skewed (default probabilities can jump upward suddenly, and defaults can occur instantaneously), which implies that collateral plays a crucial role in allowing this market to function properly.…”

Section: Introductionmentioning

confidence: 99%

The Collateral Rule: An Empirical Analysis of the CDS Market

Capponi¹,

Cheng²,

Giglio³

et al. 2017

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“…A separate literature studies the amount of margins necessary to safely clear derivatives. See, for example,Duffie, Scheicher, and Vuillemey (2015),Cruz Lopez, Hurlin, Harris, and Pérignon (2016),Huang and Menkveld (2016) and Menkveld (2017).…”

mentioning

confidence: 99%

The Failure of a Clearinghouse: Empirical Evidence*

Bignon

¹

,

Vuillemey

²

2018

View full text Add to dashboard Cite

We provide the first detailed empirical analysis of the failure of a derivatives clearinghouse: the Caisse de Liquidation, which defaulted in Paris in 1974. Using archival data, we find three main causes of the failure: (i) a weak pool of investors, (ii) the inability to contain the growth of a large member position, and (iii) risk-shifting decisions by the clearinghouse. Risk-shifting incentives aligned the clearinghouse's interests with those of the defaulting member, induced delays in the liquidation of the defaulted position, and led private renegotiation attempts to fail. Our results have implications for the design of clearing institutions. 3

show abstract

Systemic Risk in Real Time: A Risk Dashboard for Central Clearing Parties (CCPs)

Cited by 6 publications

References 39 publications

The Failure of a Clearinghouse: Empirical Evidence

The Failure of a Clearinghouse: Empirical Evidence

The Collateral Rule: An Empirical Analysis of the CDS Market

The Failure of a Clearinghouse: Empirical Evidence*

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