Crowded Positions: An Overlooked Systemic Risk for Central Clearing Parties

Review of Asset Pricing Studies (RAPS), 2017, Vol 7, pp. 209-242

Winner of the 2018 RAPS best (published) paper award

49 Pages Posted: 9 Apr 2014 Last revised: 21 Jun 2018

Date Written: April 10, 2017

Abstract

Counterparty risk could hamper trade and worsen a financial crisis. A central clearing party (CCP) insures traders against counterparty default and thus benefits trade. Default of the CCP however becomes a new systemic risk. CCP risk management does not account for risk associated with crowded positions. This paper proposes a CCP exposure measure based on tail risk in trader portfolios. It identifies and measures crowded risk and assigns it to traders according to the polluter pays principle. CCP data show that crowded positions increase CCP exposure most (about one-third) on turbulent days when exposure is high to begin with.

Keywords: CCP, systemic risk, crowded trades, margin, central clearing

JEL Classification: G20

Suggested Citation

Menkveld, Albert J., Crowded Positions: An Overlooked Systemic Risk for Central Clearing Parties (April 10, 2017). Review of Asset Pricing Studies (RAPS), 2017, Vol 7, pp. 209-242, Winner of the 2018 RAPS best (published) paper award, Available at SSRN: https://ssrn.com/abstract=2422250 or http://dx.doi.org/10.2139/ssrn.2422250

Albert J. Menkveld (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

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