The Failure of a Clearinghouse: Empirical Evidence. ECMI Working Paper No. 6 / December 2017

Bignon, Vincent and Vuillemey, Guillaume (2017) The Failure of a Clearinghouse: Empirical Evidence. ECMI Working Paper No. 6 / December 2017. [Working Paper]

PDF - Published Version Download (2680Kb)

Abstract

This paper provides 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. Riskshifting incentives aligned the clearinghouse’s interests with those of the defaulting member, induced delays in the liquidation of the defaulted position and led attempts at privatee This paper provides 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. Riskshifting incentives aligned the clearinghouse’s interests with those of the defaulting member, induced delays in the liquidation of the defaulted position and led attempts at private renegotiation to fail. Our results hav This paper provides 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. Riskshifting incentives aligned the clearinghouse’s interests with those of the defaulting member, induced delays in the liquidation of the defaulted position and led attempts at private renegotiation to fail. Our results have implications for current policy debates on the design and resolution of clearing institutions.

Actions (login required)