The Failure of a Clearinghouse: Empirical Evidence

Mardi | 2017-02-07
Salle des thèses de 16h00 à 17h20

Guillaume VUILLEMEY – Vincent BIGNON

We provide the first empirical description of the failure of a derivatives clearinghouse.We use novel, hand-collected, archive data to study risk managementincentives of the Paris commodity futures clearinghouse around its failure in 1974.We do not find evidence of lenient risk management during the commodity priceboom of 1973-1974. However, we show severe distortions of risk management incentives,akin to risk-shifting, as soon as prices collapsed and a large clearing memberapproached distress. Distortions persist during the recovery/resolution phase. Theoretically,these findings suggest that capitalization and governance were weak, butdo not imply that moral hazard was significant before the failure. Our results haveimplications for the design of clearing institutions, including their default managementschemes.