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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

Vincent Bignon

Banque de France (Microeconomic research unit)

Guillaume Vuillemey

HEC Paris - Finance Department

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Date Written: November 7, 2017

Abstract

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

Bignon, Vincent and Vuillemey, Guillaume, The Failure of a Clearinghouse: Empirical Evidence (November 7, 2017). Paris December 2016 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2862673 or http://dx.doi.org/10.2139/ssrn.2862673

Vincent Bignon

Banque de France (Microeconomic research unit) ( email )

DGEI-DEMS-SAMIC 46-2401
31 rue Croix des Petits Champs
Paris, 75001
France
+33142924330 (Phone)

Guillaume Vuillemey (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Libération
Paris, Not Applicable 78351
France
+33660204275 (Phone)

HOME PAGE: http://sites.google.com/site/guillaumevuillemey/home

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