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The Failure of a Clearinghouse:Empirical Evidence

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  • V. Bignon
  • G. Vuillemey

Abstract

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.

Suggested Citation

  • V. Bignon & G. Vuillemey, 2017. "The Failure of a Clearinghouse:Empirical Evidence," Working papers 638, Banque de France.
    • Handle: RePEc:bfr:banfra:638
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    More about this item

    Keywords

    Derivatives; central clearing; central counterparties.;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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