Derivatives Clearing, Default Risk, and Insurance

39 Pages Posted: 28 Feb 2008 Last revised: 14 Mar 2013

See all articles by Robert A. Jones

Robert A. Jones

Simon Fraser University (SFU) - Department of Economics

Christophe Perignon

HEC Paris - Finance Department

Date Written: February 1, 2012

Abstract

Failure of a clearing house would trigger cascade of damaging disruptions throughout the financial system. Yet little is known about the likelihood of such an event. 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. To quantify its default risk exposure, we characterize the tail risk of the clearing house using Extreme Value Theory. Finally, we discuss how private insurance could be used to cover the loss from defaults by clearing members.

Keywords: Derivatives Exchanges, Clearing House, Default Risk, Systemic Risk

JEL Classification: G13, G18

Suggested Citation

Jones, Robert A. and Perignon, Christophe, Derivatives Clearing, Default Risk, and Insurance (February 1, 2012). Paris December 2008 Finance International Meeting AFFI - EUROFIDAI. Available at SSRN: https://ssrn.com/abstract=1095695 or http://dx.doi.org/10.2139/ssrn.1095695

Robert A. Jones

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Christophe Perignon (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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