The Failure of a Clearinghouse: Empirical Evidence

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, the authors 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. 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 attempts at private renegotiation to fail. The results have implications for current policy debates on the design and resolution of clearing institutions.

Vincent Bignon is at the Banque de France, and Guillaume Vuillemey is at HEC Paris and CEPR.

The paper has received the ECMI Best Paper Award at the ECMI Annual Conference 2017, held in Brussels on 23 November.