The Failure of a Clearinghouse: Empirical Evidence
68 Pages Posted: 30 Aug 2017
Date Written: August 2017
We provide the first detailed 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: Derivatives, central clearing, central counterparties
JEL Classification: G23, G28, N24
Suggested Citation: Suggested Citation