IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-00829059.html
   My bibliography  Save this paper

Derivatives Clearing, Default Risk, and Insurance

Author

Listed:
  • 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
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Paul H. Kupiec, 1994. "The performance of S&P 500 futures product margins under the SPAN margining system," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(7), pages 789-811, October.
    2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    3. Brennan, Michael J., 1986. "A theory of price limits in futures markets," Journal of Financial Economics, Elsevier, vol. 16(2), pages 213-233, June.
    4. Gemmill, Gordon, 1994. "Margins and the safety of clearing houses," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 979-996, October.
    5. Turan G. Bali & Panayiotis Theodossiou, 2008. "Risk Measurement Performance of Alternative Distribution Functions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(2), pages 411-437.
    6. Paul H. Kupiec & Patricia A. White, 1996. "Regulatory competition and the efficiency of alternative derivative product margining systems," Finance and Economics Discussion Series 96-11, Board of Governors of the Federal Reserve System (US).
    7. Cotter, John & Dowd, Kevin, 2006. "Extreme spectral risk measures: An application to futures clearinghouse margin requirements," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3469-3485, December.
    8. Bernanke, Ben S, 1990. "Clearing and Settlement during the Crash," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 133-151.
    9. Cotter, John & Dowd, Kevin, 2006. "Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements," MPRA Paper 3495, University Library of Munich, Germany.
    10. McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
    11. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
    12. Gerald D. Gay & William C. Hunter & Robert W. Kolb, 1986. "A comparative analysis of futures contract margins," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 6(2), pages 307-324, June.
    13. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    14. Berg, Tobias, 2010. "The term structure of risk premia: new evidence from the financial crisis," Working Paper Series 1165, European Central Bank.
    15. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
    16. George W. Fenn & Paul Kupiec, 1993. "Prudential margin policy in a futures‐style settlement system," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(4), pages 389-408, June.
    17. Stephen Figlewski, 1984. "Margins and market integrity: Margin setting for stock index futures and options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 4(3), pages 385-416, September.
    18. Scott E. Harrington, 2009. "The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(4), pages 785-819.
    19. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    20. G. Geoffrey Booth & John Paul Broussard & Teppo Martikainen & Vesa Puttonen, 1997. "Prudent Margin Levels in the Finnish Stock Index Futures Market," Management Science, INFORMS, vol. 43(8), pages 1177-1188, August.
    21. Cotter, John, 2001. "Margin exceedences for European stock index futures using extreme value theory," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1475-1502, August.
    22. Longin, Francois, 2005. "The choice of the distribution of asset returns: How extreme value theory can help?," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 1017-1035, April.
    23. Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July.
    24. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
    25. Jordan, James V & Morgan, George Emir, 1990. " Default Risk in Futures Markets: The Customer-Broker Relationship," Journal of Finance, American Finance Association, vol. 45(3), pages 909-933, July.
    26. Bailey, Warren & Ng, Edward, 1991. " Default Premiums in Commodity Markets: Theory and Evidence," Journal of Finance, American Finance Association, vol. 46(3), pages 1071-1093, July.
    27. Rajna GIBSON & Carsten MURAWSKI, "undated". "The Price of Protection: Derivatives, Default Risk, and Margining," Swiss Finance Institute Research Paper Series 08-43, Swiss Finance Institute.
    28. Theodore E. Day, 2004. "Margin Adequacy and Standards: An Analysis of the Crude Oil Futures Market," The Journal of Business, University of Chicago Press, vol. 77(1), pages 101-136, January.
    29. Grinblatt, Mark & Keloharju, Matti, 2000. "The investment behavior and performance of various investor types: a study of Finland's unique data set," Journal of Financial Economics, Elsevier, vol. 55(1), pages 43-67, January.
    30. McNeil, Alexander J., 1997. "Estimating the Tails of Loss Severity Distributions Using Extreme Value Theory," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 27(01), pages 117-137, May.
    31. Bates, David & Craine, Roger, 1999. "Valuing the Futures Market Clearinghouse's Default Exposure during the 1987 Crash," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 248-272, May.
    32. Paul Embrechts, 2009. "Copulas: A Personal View," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 639-650.
    33. Ser-Huang Poon, 2004. "Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 581-610.
    34. Paul H. Kupiec & A. Patricia White, 1996. "Regulatory competition and the efficiency of alternative derivative product margining systems," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 943-968, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256.
    2. repec:eee:finsta:v:34:y:2018:i:c:p:1-11 is not listed on IDEAS
    3. 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.
    4. Christophe Hurlin & Christophe Pérignon, 2012. "Margin Backtesting," Working Papers halshs-00746274, HAL.
    5. Fuchun Li & Héctor Pérez Saiz, 2016. "Measuring Systemic Risk Across Financial Market Infrastructures," Staff Working Papers 16-10, Bank of Canada.
    6. Massimiliano Affinito & Matteo Piazza, 2018. "Always look on the bright side? Central counterparties and interbank markets during the financial crisis," Temi di discussione (Economic working papers) 1181, Bank of Italy, Economic Research and International Relations Area.
    7. Boissel, Charles & Derrien, François & Ors, Evren & Thesmar, David, 2017. "Systemic risk in clearing houses: Evidence from the European repo market," Journal of Financial Economics, Elsevier, vol. 125(3), pages 511-536.
    8. 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.
    9. repec:cup:jfinqa:v:52:y:2017:i:05:p:2183-2215_00 is not listed on IDEAS
    10. Albert J. Menkveld & Emiliano Pagnotta & Marius A. Zoican, 2013. "Central Clearing and Asset Prices," Tinbergen Institute Discussion Papers 13-181/IV/DSF67, Tinbergen Institute.
    11. 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.
    12. Cruz Lopez, Jorge A. & Harris, Jeffrey H. & Hurlin, Christophe & Pérignon, Christophe, 2017. "CoMargin," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(05), pages 2183-2215, October.
      • Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.

    More about this item

    Keywords

    Derivatives Clearing; Default Risk; Insurance;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-00829059. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.