The Collateral Rule: An Empirical Analysis of the CDS Market

57 Pages Posted: 14 Nov 2017

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

W. Cheng

AQR Capital Management, LLC

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Richard Haynes

Commodity Futures Trading Commission (CFTC)

Date Written: November 11, 2017

Abstract

We study the empirical determinants of collateral requirements in the cleared credit default swap (CDS) market: how margins depend on portfolio risks and market conditions, and what the implications are for theoretical models of collateral equilibrium. We construct a novel data set containing CDS portfolios and margins posted by all participants to the main CDS clearinghouse, ICE Clear Credit, covering 60% of the U.S. market. We provide direct empirical evidence that margins are much more conservatively set than what a Value-at-Risk (VaR) rule would imply, and are unequally implemented across participants. We show that more extreme tail risk measures have a higher explanatory power for observed collateral requirements than VaR, consistent with endogenous collateral theories such as Fostel and Geanakoplos (2015) where extreme events dominate in determining collateral. The dependence of collateral requirements on extreme tail risks induces potential nonlinearities in margin spirals, dampening small shocks and amplifying large ones. We also confirm empirically the main channel through which collateral-feedback effects operate in many theoretical models of equilibriums with financial frictions, such as Brunnermeier and Pedersen (2009), highlighting the prominent role of aggregate volatility and funding costs.

Keywords: Collateral Requirements, Clearinghouse, Credit Default Swaps, Value at Risk

JEL Classification: G12, G21, G28

Suggested Citation

Capponi, Agostino and Cheng, Wan-Schwin and Giglio, Stefano and Haynes, Richard, The Collateral Rule: An Empirical Analysis of the CDS Market (November 11, 2017). Available at SSRN: https://ssrn.com/abstract=3069535 or http://dx.doi.org/10.2139/ssrn.3069535

Agostino Capponi (Contact Author)

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Wan-Schwin Cheng

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Stefano Giglio

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
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

Richard Haynes

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

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