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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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    Cited by:

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    2. Selma Chaker & Nour Meddahi, 2013. "CoMargin," Staff Working Papers 13-47, Bank of Canada.
    3. 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).
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    5. 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.
    6. 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.
    7. 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 A. Cruz Lopez & Jeffrey H. Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.
      • Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2017. "CoMargin," Post-Print hal-03579309, HAL.
    8. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Discussion Paper 2020-028, Tilburg University, Center for Economic Research.
    9. Christophe Hurlin & Christophe Pérignon, 2012. "Margin Backtesting," Working Papers halshs-00746274, HAL.
    10. Li, Fuchun & Perez-Saiz, Hector, 2018. "Measuring systemic risk across financial market infrastructures," Journal of Financial Stability, Elsevier, vol. 34(C), pages 1-11.
    11. Albert J. Menkveld & Emiliano Pagnotta & Marius A. Zoican, 2013. "Central Clearing and Asset Prices," Tinbergen Institute Discussion Papers 13-181/IV/DSF67, Tinbergen Institute.
    12. Guillaume Vuillemey, 2015. "Derivatives markets : from bank risk management to financial stability [Les marchés de dérivés : gestion des risques bancaires et stabilité financière]," SciencePo Working papers Main tel-03507099, HAL.
    13. Wenqian Huang & Albert J. Menkveld & Shihao Yu, 2021. "Central Counterparty Exposure in Stressed Markets," Management Science, INFORMS, vol. 67(6), pages 3596-3617, June.
    14. Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    15. 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.
    16. Guillaume Vuillemey, 2015. "Derivatives markets : from bank risk management to financial stability [Les marchés de dérivés : gestion des risques bancaires et stabilité financière]," SciencePo Working papers tel-03507099, HAL.
    17. Mark Paddrik & H. Peyton Young, 2021. "Assessing the Safety of Central Counterparties," Working Papers 21-02, Office of Financial Research, US Department of the Treasury.
    18. Fuchun Li & Héctor Pérez Saiz, 2016. "Measuring Systemic Risk Across Financial Market Infrastructures," Staff Working Papers 16-10, Bank of Canada.
    19. 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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