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Discussion Paper Details

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Title: The Failure of a Clearinghouse: Empirical Evidence

Author(s): Vincent Bignon and Guillaume Vuillemey

Publication Date: November 2016

Keyword(s): CCP, Central clearing, Collateral, Derivatives, Failure and Resolution

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Bignon, V and Vuillemey, G. 2016. 'The Failure of a Clearinghouse: Empirical Evidence'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11630