Crowded Positions: An Overlooked Systemic Risk for Central Clearing Parties
Review of Asset Pricing Studies (RAPS), 2017, Vol 7, pp. 209-242
49 Pages Posted: 9 Apr 2014 Last revised: 21 Jun 2018
Date Written: April 10, 2017
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: Suggested Citation