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The Failure of a Clearinghouse:Empirical Evidence

Author

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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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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Resolution Regimes for Central Clearing Parties
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-10-09 18:02:53

    Citations

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    Cited by:

    1. 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.
    2. Cecchetti, Stephen G & Schoenholtz, Kermit, 2017. "Regulatory Reform: A Scorecard," CEPR Discussion Papers 12465, C.E.P.R. Discussion Papers.
    3. Gaetano Antinolfi & Francesca Carapella & Francesco Carli, 2018. "Transparency and Collateral : Central versus Bilateral Clearing," Finance and Economics Discussion Series 2018-017, Board of Governors of the Federal Reserve System (U.S.).
    4. 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).
    5. Li, Fuchun & Perez-Saiz, Hector, 2018. "Measuring systemic risk across financial market infrastructures," Journal of Financial Stability, Elsevier, vol. 34(C), pages 1-11.
    6. Jorge Cruz Lopez & Mark Manning, 2017. "Who Pays? CCP Resource Provision in the Post-Pittsburgh World," Discussion Papers 17-17, Bank of Canada.
    7. Wenqian Huang, 2019. "Central counterparty capitalization and misaligned incentives," BIS Working Papers 767, Bank for International Settlements.
    8. Vuillemey, Guillaume, 2018. "Completing Markets with Contracts: Evidence from the First Central Clearing Counterparty," CEPR Discussion Papers 13230, C.E.P.R. Discussion Papers.
    9. Umar Faruqui & Wenqian Huang & Előd Takáts, 2018. "Clearing risks in OTC derivatives markets: the CCP-bank nexus," BIS Quarterly Review, Bank for International Settlements, December.
    10. Gaetano Antinolfi & Francesca Carapella & Francesco Carli, 2019. "Transparency and Collateral: The Design of CCPs' Loss Allocation Rules," Finance and Economics Discussion Series 2019-058, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Derivatives; central clearing; central counterparties.;

    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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