The Failure of a Clearinghouse: Empirical Evidence*

Bignon, Vincent; Vuillemey, Guillaume

doi:10.1093/rof/rfy039

Cited by 13 publications

(9 citation statements)

References 26 publications

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“…26 Large banks includes those with over $250 billion in assets. Bignon and Vuillemey (2018) describe one of the very few failures of a CCP, the Caisse de Liquidation des Affairesen Marchandises in Paris. In 1974, following a collapse of sugar prices, the CCP faced the default of a clearing member that had cleared a large volume of sugar futures.…”

Section: Default Fund Contributions and Assessmentsmentioning

confidence: 99%

Central Clearing and Systemic Liquidity Risk

King¹,

Nesmith

Paulson

et al. 2020

FEDS

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By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, largeCCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or more large financial institutions default. Liquidity-focused macroprudential stress tests could help to assess and manage this systemic liquidity risk.

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Section: Default Fund Contributions and Assessmentsmentioning

confidence: 99%

Central Clearing and Systemic Liquidity Risk

King¹,

Nesmith

Paulson

et al. 2020

FEDS

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“…The importance of client clearing was seen in the role it played in the Caisse de Liquidation des Affaires en Marchandise default in 1974(Bignon and Vuillemey (2020)). Though not as consequential, in Mar.…”

mentioning

confidence: 99%

Central Counterparty Default Waterfalls and Systemic Loss

Ghamami¹,

Paddrik²,

Zhang³

2022

J. Financ. Quant. Anal.

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The Office of Financial Research (OFR) Working Paper Series allows members of the OFR staff and their coauthors to disseminate preliminary research findings in a format intended to generate discussion and critical comments. Papers in the OFR Working Paper Series are works in progress and subject to revision.Views and opinions expressed are those of the authors and do not necessarily represent official positions or policy of the OFR or Treasury. Comments and suggestions for improvements are welcome and should be directed to the authors. OFR working papers may be quoted without additional permission.

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“…At first, I present the three fails, followed by the near fails in modern history. Bignon and Vuillemey (2020) analyzed the fail of the French CCP from 1974.…”

Section: Central Counterparty Defaults and Near-failsmentioning

confidence: 99%

“…The sugar's price has been multiplied by six in a oneyear timeframe, peaking from 1,300 to 8,100 FRF/ton. Meanwhile, several countries experienced shortages of sugar and the combination of structural and exceptional factors lead to expectations of a long-lasting sugar shortage (Bignon and Vuillemey, 2020).…”

Section: Central Counterparty Defaults and Near-failsmentioning

confidence: 99%

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Central Counterparties : Risk management of central counterparties focusing on the analysis of stress tests

Friesz¹

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My thesis focuses on central counterparties (CCPs) and the stress tests they perform to achieve a resistant operation and therefore increase market resilience. CCPs’ role is to take over the counterparty risk during trading. A CCP needs to operate a multi-level guarantee system that can absorb losses of clearing members’ defaults to fulfill its role. One of the main focal points of my research is to analyze how the size of the guarantee system changes and how the cross-guarantee undertaking changes between clearing members and markets if the CCP merges the guarantee systems of different markets. This question is essential from a financial stability perspective since the guarantee system’s size and structure will affect the loss-absorbing capacity of a CCP. Monte Carlo simulation was used to simulate a 30 years time series for three different products, which gave the basis for the Value-at-Risk-based margin calculation and the stress test-based default fund calculation. Results show that merging the guarantee systems will always decrease the total value of the guarantees because the margin will decrease, which cannot be offset by the increase in the default fund size. In conclusion, it is not optimal from the financial stability perspective to merge the guarantee systems. However, merging is more suitable if the CCP wants to provide cheaper services or if the clearing members are willing to cross-guarantee each other. In order to increase efficiency and to analyze and align the incentives of the CCP and its clearing members, I decided to use the model presented above to shows how the CCP’s own contribution in the default waterfall is affected in different market structures. The model needed to be simplified to perform a sensitivity test on the skin-in-the-game. Overall, the model is improved, and all three layers of the default waterfall are part of the stress testing, so results are based on the whole default waterfall rather than just a part of it and therefore reached more sophisticated conclusions. The proposed model shows how the CCP’s own contribution in the default waterfall is affected in different structures. It is an important question since this own contribution is being financed from the capital of the CCP. So the larger this contribution is, the larger the stake of the CCPs’ capital is risked. Results for the four different operations are as follows: • The merged market scenario is risky for the CCP since it offers the lowest value for the overall default waterfall, and also, the CCP has to provide the second largest SITG value compared to the fully or partially separated - IM structures. This setup is favorable for some members engaging in risky trading and also affects clearing members’ liquidity the least. In the long run, the CCP would need a tremendous amount of capital to support the system, mainly if it aims to protect non-defaulting members. However, to avoid resolution, the CCP relies on the fund provided by the non-defaulting members. Due to the heightened level of loss-mutualization, this setup is disadvantageous for members active only on one of the cleared markets. • The separated design gives an advantage to the CCP, but it is not beneficial for minor participants from the market because the clearing activity can become too costly. • The default fund level separation setup was the least favorable since it required the highest SITG, while the members had a higher default fund contribution obligation. • The partially separated - IM one was proven to be the most suitable for all stakeholders. It brings the benefits of a higher margin requirement and smaller SITG for the CCP, but members can profit from hedging and risk-mutualization on a default fund level, ultimately, this being the best compromise between parties.

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The Failure of a Clearinghouse: Empirical Evidence*

Cited by 13 publications

References 26 publications

Central Clearing and Systemic Liquidity Risk

Central Clearing and Systemic Liquidity Risk

Central Counterparty Default Waterfalls and Systemic Loss

Central Counterparties : Risk management of central counterparties focusing on the analysis of stress tests

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