The Failure of a Clearinghouse: Empirical Evidence
Paris December 2016 Finance Meeting EUROFIDAI - AFFI
68 Pages Posted: 2 Nov 2016 Last revised: 8 Nov 2017
Date Written: November 7, 2017
We provide the first empirical analysis of the failure of a derivatives clearinghouse: the Caisse de Liquidation, which defaulted in Paris in 1974. Using archival data, we find three main causes of the failure: (i) a weak pool of investors, (ii) the inability to contain the growth of a large member position, and (iii) risk-shifting decisions by the clearinghouse. Risk-shifting incentives aligned the clearinghouse's interests with those of the defaulting member, induced delays in the liquidation of the defaulted position, and led private renegotiation attempts to fail. Our results have implications for the design of clearing institutions.
Keywords: Central Clearing; Failure; Risk Management; CCP; Collateral; Derivatives
JEL Classification: G23
Suggested Citation: Suggested Citation