Clearinghouse Margin Requirements

Abstract

We model the decision problem faced by a profit-maximizing clearinghouse, which sets fee and margin requirements for heterogeneous traders who may default. We capture the main tradeoffs underpinning the clearinghouse's choices: higher fee and better default protection come at the cost of decreased market volume. We show that the equilibrium margin requirements are determined not only by price volatility, but also by market variables including trader fundamentals and funding costs. Our results (i) explain why margins are often comparatively high relative to fees and daily price movements , (ii) capture the "term structure" of margins; in particular, that some long maturity futures contracts tend to have lower margins, and (iii) predict high sensitivity of margins to funding costs.

Keywords: Margin requirements, central clearing, credit risk, market risk

JEL Classification: G21, G28