Link to the University of Pittsburgh
Link to the University Library SystemContact us link
AEI Banner

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. [Policy Paper]

[img] 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.

    Export/Citation:EndNote | BibTeX | Dublin Core | ASCII (Chicago style) | HTML Citation | OpenURL
    Social Networking:
    Item Type: Policy Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > banks/financial markets
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > ECMI Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 05 Dec 2017 09:48
    Number of Pages: 72
    Last Modified: 05 Dec 2017 09:48
    URI: http://aei.pitt.edu/id/eprint/92749

    Actions (login required)

    View Item

    Document Downloads