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LSF Lunch Seminar : The Failure of a Clearinghouse: Empirical Evidence

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Speaker: Guillaume Vuillemey - HEC Paris and CEPR
Event date: Thursday, 15 March 2018 12:30 pm - 01:45 pm
Place: Luxembourg School of Finance
JFK Building
29,Avenue J.F Kennedy
L-1855 Luxembourg
Ground Floor, Nancy Room

The Failure of a Clearinghouse: Empirical Evidence

 

Abstract

We provide the first empirical analysis of the failure of a derivatives clearinghouse:
the Caisse de Liquidation in Paris, which defaulted in 1974. Using archival
data, we find two causes of losses for the clearinghouse: (i) a weak pool of investors,
and (ii) the inability to contain the growth of a large position by one member.
However, the failure was primarily due to agency conflicts that led to risk-shifting.
Risk-shifting incentives aligned the clearinghouse’s interests with those of the defaulting
member, induced delays in the liquidation of the defaulted position, and
led private renegotiation attempts to fail. Our results have implications for current
debates on the design and resolution of clearinghouses and of other financial
institutions.

Data: Invitation_G.Vuillemey_15.03.2018.pdf 338.48 kB