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Derivatives Clearing, Default Risk, and Insurance

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  • Robert A. Jones
  • Christophe Pérignon

Abstract

Using daily data on margins and variation margins for all clearing members of the Chicago Mercantile Exchange, we analyze the clearing house exposure to the risk of default by clearing members. We find that the major source of default risk for a clearing member is proprietary trading rather than trading by customers. Additionally, we show that extreme losses suffered by important clearing firms tend to cluster, which raises systemic risk concerns. Finally, we discuss how private insurance could be used to cover the loss from defaults by clearing members.
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  • Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
  • Handle: RePEc:bla:jrinsu:v:80:y:2013:i:2:p:373-400
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    File URL: http://hdl.handle.net/10.1111/j.1539-6975.2012.01489.x
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    Cited by:

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    2. Emm, Ekaterina E. & Gay, Gerald D. & Shen, Mo, 2020. "Futures commission merchants, customer funds and capital requirements: An organizational analysis of the futures industry," Journal of Commodity Markets, Elsevier, vol. 18(C).
    3. Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256.
    4. Olivier de Bandt & Jean-Cyprien Héam & Claire Labonne & Santiago Tavolaro, 2015. "La mesure du risque systémique après la crise financière," Revue économique, Presses de Sciences-Po, vol. 66(3), pages 481-500.
    5. Injun Hwang & Baeho Kim, 2020. "Heterogeneity and netting efficiency under central clearing: A stochastic network analysis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(2), pages 192-208, February.
    6. Cruz Lopez, Jorge A. & Harris, Jeffrey H. & Hurlin, Christophe & Pérignon, Christophe, 2017. "CoMargin," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(5), pages 2183-2215, October.
      • Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.
    7. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Discussion Paper 2020-028, Tilburg University, Center for Economic Research.
    8. Christophe Hurlin & Christophe Pérignon, 2012. "Margin Backtesting," Working Papers halshs-00746274, HAL.
    9. Li, Fuchun & Perez-Saiz, Hector, 2018. "Measuring systemic risk across financial market infrastructures," Journal of Financial Stability, Elsevier, vol. 34(C), pages 1-11.
    10. Albert J. Menkveld & Emiliano Pagnotta & Marius A. Zoican, 2013. "Central Clearing and Asset Prices," Tinbergen Institute Discussion Papers 13-181/IV/DSF67, Tinbergen Institute.
    11. Wenqian Huang & Albert Menkveld & Shihao Yu, 2019. "Central counterparty exposure in stressed markets," BIS Working Papers 833, Bank for International Settlements.
    12. Massimiliano Affinito & Matteo Piazza, 2018. "Always look on the bright side? Central counterparties and interbank markets during the financial crisis," Temi di discussione (Economic working papers) 1181, Bank of Italy, Economic Research and International Relations Area.
    13. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    14. Fuchun Li & Héctor Pérez Saiz, 2016. "Measuring Systemic Risk Across Financial Market Infrastructures," Staff Working Papers 16-10, Bank of Canada.
    15. Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012. "When Lower Risk Increases Profit: Competition and Control of a Central Counterparty," Staff Working Papers 12-35, Bank of Canada.

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