Clearing House, Margin Requirements, and Systemic Risk
Review of Futures Markets, Vol. 19 (2011)
17 Pages Posted: 21 Apr 2018
Date Written: March 21, 2011
Margins are the major safeguards against default risk on a derivatives exchange. When the clearing house sets margin requirements, it does so by only focusing on individual clearing firm positions (e.g., the SPAN system). We depart from this traditional approach and present an alternative method that accounts for inter-dependencies among clearing members when setting margins. Our method generalizes the SPAN system by allowing individual margins to increase when clearing firms are more likely to be in financial distress simultaneously.
Keywords: derivatives, tail risk, default risk, extreme dependence, copulas
JEL Classification: G13
Suggested Citation: Suggested Citation