The Failure of a Clearinghouse: Empirical Evidence
63 Pages Posted: 14 Nov 2016
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The Failure of a Clearinghouse: Empirical Evidence
The Failure of a Clearinghouse: Empirical Evidence
Date Written: November 2016
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.
Keywords: CCP, Central clearing, Collateral, Derivatives, Failure, Resolution
JEL Classification: G23
Suggested Citation: Suggested Citation