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Crowded Positions: An Overlooked Systemic Risk for Central Clearing Parties

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  • Albert J Menkveld

Abstract

Counterparty risk could hamper trade and worsen a financial crisis. A central clearing party (CCP) insures traders against counterparty default and thus benefits trade. Default of the CCP however becomes a new systemic risk. CCP risk management does not account for risks associated with crowded positions. This paper proposes a CCP exposure measure based on tail risk in trader portfolios. It identifies and measures crowded risk and assigns it to traders according to the polluter pays principle. CCP data show that crowded positions increase CCP exposure most (about one-third) on turbulent days, when exposure is high already.Received October 08, 2016; editorial decision March 13, 2017 by Editor Wayne Ferson

Suggested Citation

  • Albert J Menkveld, 2017. "Crowded Positions: An Overlooked Systemic Risk for Central Clearing Parties," Review of Asset Pricing Studies, Oxford University Press, vol. 7(2), pages 209-242.
  • Handle: RePEc:oup:rasset:v:7:y:2017:i:2:p:209-242.
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    File URL: http://hdl.handle.net/10.1093/rapstu/rax016
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    References listed on IDEAS

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    1. Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256.
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    Cited by:

    1. Kubitza, Christian & Pelizzon, Loriana & Getmansky, Mila, 2018. "The pitfalls of central clearing in the presence of systematic risk," ICIR Working Paper Series 31/18, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    2. Cenedese, Gino & Ranaldo, Angelo & Vasios, Michalis, 2020. "OTC premia," Journal of Financial Economics, Elsevier, vol. 136(1), pages 86-105.
    3. Evangelos Benos & Wenqian Huang & Albert Menkveld & Michalis Vasios, 2019. "The cost of clearing fragmentation," BIS Working Papers 826, Bank for International Settlements.
    4. Berlinger, Edina & Dömötör, Barbara & Illés, Ferenc, 2019. "Anti-cyclical versus risk-sensitive margin strategies in central clearing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 117-131.
    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. Wenqian Huang & Albert Menkveld & Shihao Yu, 2019. "Central counterparty exposure in stressed markets," BIS Working Papers 833, Bank for International Settlements.

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