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Derivatives Clearing, Default Risk, and Insurance

Author

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  • Christophe Pérignon

    () (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Robert A. Jones

    (SFU.ca - Simon Fraser University)

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.

Suggested Citation

  • Christophe Pérignon & Robert A. Jones, 2013. "Derivatives Clearing, Default Risk, and Insurance," Post-Print hal-00829059, HAL.
    • Handle: RePEc:hal:journl:hal-00829059
    DOI: 10.1111/j.1539-6975.2012.01489.x
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00829059
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    3. Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256.
    4. 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.
    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. 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 Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.
    7. Li, Fuchun & Perez-Saiz, Hector, 2018. "Measuring systemic risk across financial market infrastructures," Journal of Financial Stability, Elsevier, vol. 34(C), pages 1-11.
    8. Albert J. Menkveld & Emiliano Pagnotta & Marius A. Zoican, 2013. "Central Clearing and Asset Prices," Tinbergen Institute Discussion Papers 13-181/IV/DSF67, Tinbergen Institute.
    9. 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.
    10. 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.
    11. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Discussion Paper 2020-028, Tilburg University, Center for Economic Research.
    12. Christophe Hurlin & Christophe Pérignon, 2012. "Margin Backtesting," Working Papers halshs-00746274, HAL.
    13. Wenqian Huang & Albert Menkveld & Shihao Yu, 2019. "Central counterparty exposure in stressed markets," BIS Working Papers 833, Bank for International Settlements.
    14. Fuchun Li & Héctor Pérez Saiz, 2016. "Measuring Systemic Risk Across Financial Market Infrastructures," Staff Working Papers 16-10, Bank of Canada.
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