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CoMargin

66 Pages Posted: 14 Oct 2011 Last revised: 21 Dec 2015

Jorge Cruz Lopez

Bank of Canada

Christophe Hurlin

University of Orleans

Jeffrey H. Harris

American University

Christophe Perignon

HEC Paris - Finance Department

Date Written: December 15, 2015

Abstract

We present CoMargin, a new methodology to estimate collateral requirements in derivatives central counterparties (CCPs). CoMargin depends on both the tail risk of a given market participant and its interdependence with other participants. Our approach internalizes trading externalities and enhances the stability of CCPs, thus, reducing systemic risk concerns. We assess our methodology using proprietary data from the Canadian Derivatives Clearing Corporation that includes daily observations of the actual trading positions of all of its members from 2003 to 2011. We show that CoMargin outperforms existing margining systems by stabilizing the probability and minimizing the shortfall of simultaneous margin-exceeding losses.

Keywords: Collateral, Counterparty Risk, Derivatives Markets, Extreme Dependence

JEL Classification: G13

Suggested Citation

Cruz Lopez, Jorge and Hurlin, Christophe and Harris, Jeffrey H. and Perignon, Christophe, CoMargin (December 15, 2015). Available at SSRN: https://ssrn.com/abstract=1943562 or http://dx.doi.org/10.2139/ssrn.1943562

Jorge Abraham Cruz Lopez

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
+1 (613) 782 8217 (Phone)
+1 (613) 782 7136 (Fax)

HOME PAGE: http://www.bankofcanada.ca/profile/jorge-cruz-lopez/

Christophe Hurlin

University of Orleans ( email )

Université d'Orléans
Rue de Blois B.P. 6739 45
France

Jeffrey H. Harris

American University ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)

Christophe Perignon (Contact Author)

HEC Paris - Finance Department ( email )

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

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