Systemic Risk in Clearing Houses: Evidence from the European Repo Market

57 Pages Posted: 8 Oct 2014 Last revised: 9 Oct 2015

See all articles by Charles Boissel

Charles Boissel

HEC Paris - Finance Department

François Derrien

HEC Paris - Finance Department

Evren Ors

HEC Paris - Finance Department

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 27, 2015

Abstract

How do crises affect Central clearing Counterparties (CCPs)? We focus on CCPs that clear and guarantee a large and safe segment of the repo market during the Eurozone sovereign debt crisis. We start by developing a simple framework to infer CCP stress, which can be measured through the sensitivity of repo rates to sovereign CDS spreads. Such sensitivity jointly captures three effects: (1) the effectiveness of the haircut policy, (2) CCP member default risk (conditional on sovereign default) and (3) CCP default risk (conditional on both sovereign and CCP member default). The data show that, during the sovereign debt crisis of 2011, repo rates strongly respond to movements in sovereign risk, in particular for GIIPS countries, indicating significant CCP stress. Our model suggests that repo investors behaved as if the conditional probability of CCP default was very large.

Keywords: repurchase agreement, sovereign debt crisis, LTRO, secured money market lending

Suggested Citation

Boissel, Charles and Derrien, François and Ors, Evren and Thesmar, David, Systemic Risk in Clearing Houses: Evidence from the European Repo Market (July 27, 2015). HEC Paris Research Paper No. FIN-2015-1112, Available at SSRN: https://ssrn.com/abstract=2506677 or http://dx.doi.org/10.2139/ssrn.2506677

Charles Boissel (Contact Author)

HEC Paris - Finance Department ( email )

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

François Derrien

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
33 1 39 67 72 98 (Phone)

HOME PAGE: http://www.hec.fr/derrien

Evren Ors

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 3967 7123 (Phone)
+33 1 3967 7085 (Fax)

HOME PAGE: http://www.hec.fr/ors

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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