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The Failure of a Clearinghouse: Empirical Evidence

Author

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  • Bignon, Vincent
  • Vuillemey, Guillaume

Abstract

We provide the first empirical description of the failure of a derivatives clearinghouse. We use novel, hand-collected, archive data to study risk management incentives by the Paris commodity futures clearinghouse around its failure in 1974. We do not find evidence of lenient risk management during the commodity price boom of 1973-1974. However, we show strong distortions of risk management incentives, akin to risk-shifting, as soon as prices collapsed and a large clearing member approached distress. Distortions persist during the recovery/resolution phase. Theoretically, these distortions suggest that capitalization and governance were weak, but do not imply that moral hazard was significant before the failure. Our findings have implications for the design of clearing institutions, including their default management schemes.

Suggested Citation

  • Bignon, Vincent & Vuillemey, Guillaume, 2016. "The Failure of a Clearinghouse: Empirical Evidence," CEPR Discussion Papers 11630, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11630
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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

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    Cited by:

    1. 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.).
    2. repec:eee:finsta:v:34:y:2018:i:c:p:1-11 is not listed on IDEAS
    3. Jorge Cruz Lopez & Mark Manning, 2017. "Who Pays? CCP Resource Provision in the Post-Pittsburgh World," Discussion Papers 17-17, Bank of Canada.

    More about this item

    Keywords

    CCP; Central clearing; Collateral; Derivatives; Failure; Resolution;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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