Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-25T08:07:28.008Z Has data issue: false hasContentIssue false
  • English
  • Français

CoMargin

Published online by Cambridge University Press:  31 October 2017

Jorge A. Cruz Lopez ,
Jeffrey H. Harris ,
Christophe Hurlin  and
Christophe Pérignon
Get access Rights & Permissions [Opens in a new window]

Abstract

We present CoMargin, a new methodology to estimate collateral requirements in derivatives central counterparties (CCPs). CoMargin depends on both the tail risk of a given market participant and its interdependence with other participants. Our approach internalizes trading externalities and enhances the stability of CCPs, thus reducing systemic risk concerns. We assess our methodology using proprietary data from the Canadian Derivatives Clearing Corporation that include daily observations of the actual trading positions of all of its members from 2003 to 2011. We show that CoMargin outperforms existing margining systems by stabilizing the probability and minimizing the shortfall of simultaneous margin-exceeding losses.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 5 , October 2017 , pp. 2183 - 2215
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We thank the Canadian Derivatives Clearing Corporation (CDCC) for providing us with the data used in this paper. We are very grateful to the Chair L’Autorité de Contrôle Prudentiel et de Résolution (ACPR)/Risk Foundation: Regulation and Systemic Risk, the Dauphine-Amundi Chair in Asset Management, and the Montreal Institute of Structured Products and Derivatives (Institut de la Finance Structurée et des Instruments Dérivés de Montréal, or IFSID) for funding and supporting our research. We appreciate the time and support provided by Nikil Chande, Scott Hendry, Nicholas Labelle St-Pierre, and Jonathan Witmer. We thank an anonymous referee, Andrew Barton, Hendrik Bessembinder (the editor), Mark Chambers, Pierre Collin-Dufresne, Darrel Duffie, Christian Gourieroux, Nicholas Linder, Anthony Lynch, Serafin Martinez-Jaramillo, Albert Menkveld, Gustavo Schwenkler, Guillaume Vuillemey, Anne Wetherilt, Haoxiang Zhu, seminar participants at the Bank of England, Bank of Japan, Banque de France, Banco de Mexico, Boston University, French Prudential Supervisory and Resolution Authority (ACPR), Global Risk Institute, and the Reserve Bank of Australia, as well as the participants of the 2013 Annual Workshop of the Dauphine-Amundi Chair in Asset Management, the 2014 IFSID Conference on Derivatives, the 2014 Society for Financial Econometrics (SOFIE) Conference on Systemic Risk, the 2015 American Finance Association meeting, Bank of Canada Financial Intermediation and Market Dynamics Workshop, the 2011 Australasian Finance and Banking Conference, and the QUT-Princeton Frontiers in Financial Econometrics Workshop for their valuable comments.

References

Acharya, V. V., and Bisin, A.. “Counterparty Risk Externality: Centralized versus Over-the-Counter Markets.” Journal of Economic Theory, 149 (2014), 153–182.CrossRefGoogle Scholar
Acharya, V. V.; Engle, R.; Figlewski, S.; Lynch, A.; and Subrahmanyam, M.. “Centralized Clearing for Credit Derivatives.” In Restoring Financial Stability: How to Repair a Failed System, Acharya, V. and Richardson, M., eds. Hoboken, NJ: John Wiley & Sons (2009).CrossRefGoogle Scholar
Acharya, V. V.; Pedersen, L. H.; Philippon, T.; and Richardson, M. P.. “Measuring Systemic Risk.” Review of Financial Studies, 30 (2017), 2–47.Google Scholar
Adrian, T., and Brunnermeier, M. K.. “CoVaR.” American Economic Review, 106 (2016), 1705–1741.Google Scholar
Adrian, T., and Shin, H. S.. “Procyclical Leverage and Value-at-Risk.” Review of Financial Studies, 27 (2014), 373–403.Google Scholar
Arora, N.; Gandhi, P.; and Longstaff, F.. “Counterparty Credit Risk and the Credit Default Swap Market.” Journal of Financial Economics, 103 (2012), 280–293.CrossRefGoogle Scholar
Artzner, P.; Delbaen, F.; Eber, J.-M.; and Heath, D.. “Coherent Measures of Risk.” Mathematical Finance, 9 (1999), 203–228.Google Scholar
Bae, K. H.; Karolyi, A.; and Stulz, R. M.. “A New Approach to Measuring Financial Contagion.” Review of Financial Studies, 16 (2003), 717–763.Google Scholar
Bank for International Settlements. Derivatives Statistics. June (2015a).Google Scholar
Bank for International Settlements. Margin Requirements for Non-Centrally Cleared Derivatives. Mar. (2015b).Google Scholar
Benoit, S.; Colliard, J.-E.; Hurlin, C.; and Pérignon, C.. “Where the Risks Lie: A Survey of Systemic Risk.” Review of Finance, 21 (2017), 109–152.CrossRefGoogle Scholar
Berkowitz, J.; Christoffersen, P. F.; and Pelletier, D.. “Evaluating Value-at-Risk Models with Desk-Level Data.” Management Science, 57 (2011), 2213–2227.Google Scholar
Berkowitz, J., and O’Brien, J.. “How Accurate Are Value-at-Risk Models at Commercial Banks?” Journal of Finance, 57 (2002), 1093–1111.CrossRefGoogle Scholar
Bernanke, B.“Clearing and Settlement during the Crash.” Review of Financial Studies, 3 (1990), 133–151.Google Scholar
Bernstein, A.; Hughson, E. N.; and Weidenmier, M.. “Counterparty Risk and the Establishment of the New York Stock Exchange Clearinghouse.” NBER Working Paper No. 20459 (2014).Google Scholar
Biais, B.; Heider, F.; and Hoerova, M.. “Clearing, Counterparty Risk and Aggregate Risk.” IMF Economic Review, 60 (2012), 193–222.Google Scholar
Biais, B.; Heider, F.; and Hoerova, M.. “Risk-Sharing or Risk-Taking? An Incentive Theory of Counterparty Risk: Clearing and Margins.” Journal of Finance, 71 (2016), 1669–1698.Google Scholar
Bignon, V., and Vuillemey, C.. “The Failure of a Clearinghouse: Empirical Evidence.” Working Paper, HEC Paris and Banque de France (2017).Google Scholar
Billio, M.; Getmansky, M.; Lo, A. W.; and Pelizzon, L.. “Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors.” Journal of Financial Economics, 104 (2012), 535–559.CrossRefGoogle Scholar
Bliss, R. R., and Steigerwald, R. S.. “Derivatives Clearing and Settlement: A Comparison of Central Counterparties and Alternative Structures.” Working Paper, Federal Reserve Bank of Chicago (2006).Google Scholar
Boissel, C.; Derrien, F.; Ors, E.; and Thesmar, D.. “Systemic Risk in Clearing Houses: Evidence from the European Repo Market.” Journal of Financial Economics, 125 (2017), 511–536.CrossRefGoogle Scholar
Booth, G. G.; Broussard, J. P.; Martikainen, T.; and Puttonen, V.. “Prudent Margin Levels in the Finnish Stock Index Futures Market.” Management Science, 43 (1997), 1177–1188.Google Scholar
Boyson, N.; Stahel, C. W.; and Stulz, R. M.. “Hedge Fund Contagion and Liquidity Shocks.” Journal of Finance, 65 (2010), 1789–1816.Google Scholar
Brownlees, C. T., and Engle, R. F.. “SRISK: A Conditional Capital Shortfall Index for Systemic Risk Measurement.” Review of Financial Studies, 30 (2017), 48–79.Google Scholar
Brunnermeier, M. K., and Cheridito, P.. “Measuring and Allocating Systemic Risk.” Working Paper, Princeton University (2014).Google Scholar
Campbell, B., and Chung, C.. “CGB: Poised for Takeoff. An Analysis of the Ten-Year Government of Canada Bond Future Based on Intraday Trading Data.” Working Paper, CIRANO (2003).Google Scholar
Chicago Mercantile Exchange. CME Clearing Financial Safeguards (2012).Google Scholar
Christoffersen, P.“Backtesting.” In Encyclopedia of Quantitative Finance, Cont, R., ed. Hoboken, NJ: John Wiley & Sons (2009).Google Scholar
Christoffersen, P.; Errunza, V.; Jacobs, K.; and Langlois, H.. “Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach.” Review of Financial Studies, 25 (2012), 3711–3751.Google Scholar
Committee on Payment and Settlement Systems and International Organization of Securities Commissions. Principles for Financial Market Infrastructures (2012).Google Scholar
Cotter, J.“Extreme Value Calculations of European Futures Margin Requirements.” Journal of Banking and Finance, 25 (2001), 1475–1502.CrossRefGoogle Scholar
Day, T. E., and Lewis, C. M.. “Margin Adequacy and Standards: An Analysis of the Crude Oil Futures Market.” Journal of Business, 77 (2004), 101–135.Google Scholar
Duffie, D.“Replumbing Our Financial System: Uneven Progress.” International Journal of Central Banking, 9 (2013a), 251–250.Google Scholar
Duffie, D.“The Controlled Failure of Central Clearing Parties.” Speech at the FEBS/LabEx-ReFi Financial Regulation and Systemic Risk Conference, Paris (2013b).Google Scholar
Duffie, D.; Li, A.; and Lubke, T.. “Perspectives on OTC Derivatives Market Infrastructure.” Federal Reserve Bank of New York Staff Reports Policy No. 424 (2010).Google Scholar
Duffie, D.; Scheicher, M.; and Vuillemey, G.. “Central Clearing and Collateral Demand.” Journal of Financial Economics, 116 (2015), 237–256.Google Scholar
Duffie, D., and Zhu, H.. “Does a Central Clearing Counterparty Reduce Counterparty Risk?” Review of Asset Pricing Studies, 1 (2011), 74–95.CrossRefGoogle Scholar
Engle, R. F.“Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models.” Journal of Business and Economic Statistics, 20 (2002), 339–350.CrossRefGoogle Scholar
European Union. European Market Infrastructure Regulation (EMIR). (2012).Google Scholar
Figlewski, S.“Margins and Market Integrity: Margin Setting for Stock Index Futures and Options.” Journal of Futures Markets, 4 (1984), 385–414.Google Scholar
Financial Stability Board (FSB). OTC Derivatives Market Reforms. July (2015).Google Scholar
Fontaine, J.-S.; Pérez Saiz, H.; and Slive, J.. “Dealers’ Competition and Control of a Central Counterparty: When Lower Risk Increases Profit.” Working Paper, Bank of Canada (2013).Google Scholar
Gârleanu, N., and Pedersen, L. H.. “Margin-Based Asset Pricing and Deviations from the Law of One Price.” Review of Financial Studies, 24 (2011), 1980–2022.Google Scholar
Gemmill, G.“Margins and the Safety of Clearing Houses.” Journal of Banking and Finance, 18 (1994), 979–996.Google Scholar
Genest, C.; Ghoudi, K.; and Rivest, L. P.. “A Semiparametric Estimation Procedure of Dependence Parameters in Multivariate Families of Distributions.” Biometrika, 82 (1995), 543–552.Google Scholar
Ghamami, S.“Static Models of Central Counterparty Risk.” Working Paper, Board of Governors of the Federal Reserve (2014).CrossRefGoogle Scholar
Girardi, G., and Ergun, T.. “Systemic Risk Measurement: Multivariate GARCH Estimation of CoVaR.” Journal of Banking and Finance, 37 (2013), 3169–3180.Google Scholar
Harris, J. H., and Stahel, C. W.. “Funding Constraints and Liquidity Contagion in U.S. Equity and Treasury Markets.” Working Paper, U.S. Securities and Exchange Commission (2011).Google Scholar
Hedegaard, E.“Causes and Consequences of Margin Levels in Futures Markets.” Working Paper, Arizona State University (2013).Google Scholar
Hirshleifer, D.; Subrahmanyam, A.; and Titman, S.. “Security Analysis and Trading Patterns When Some Investors Receive Information before Others.” Journal of Finance, 49 (1994), 1665–1698.Google Scholar
Hurlin, C., and Pérignon, C.. “Margin Backtesting.” Review of Futures Markets, 20 (2012), 179–194.Google Scholar
Jones, R. A., and Pérignon, C.. “Derivatives Clearing, Default Risk, and Insurance.” Journal of Risk and Insurance, 80 (2013), 373–400.Google Scholar
Jordan, J. V., and Morgan, G. E.. “Default Risk in Futures Markets: The Customer-Broker Relationship.” Journal of Finance, 45 (1990), 909–933.Google Scholar
Knott, R., and Mills, A.. “Modelling Risk in Central Counterparty Clearing Houses: A Review.” Bank of England Financial Stability Review (Dec. 2002), 162–174.Google Scholar
Koeppl, T.; Monnet, C.; and Temzelides, T.. “Optimal Clearing Arrangements for Financial Trades.” Journal of Financial Economics, 103 (2012), 189–203.Google Scholar
Kupiec, P.“The Performance of S&P 500 Futures Product Margins under the SPAN Margining System.” Journal of Futures Markets, 14 (1994), 789–811.Google Scholar
Longin, F., and Solnik, B.. “Extreme Correlation of International Equity Markets.” Journal of Finance, 56 (2001), 649–676.Google Scholar
Longstaff, F.“The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices.” Journal of Business, 77 (2004), 511–526.Google Scholar
Loon, Y. C., and Zhong, Z. K.. “The Impact of Central Clearing on Counterparty Risk, Liquidity, and Trading: Evidence from the Credit Default Swap Market.” Journal of Financial Economics, 112 (2014), 91–115.Google Scholar
Menkveld, A. J.“Systemic Liquidation Risk: Centralized Clearing, Margins, and the Default Fund.” Working Paper, VU University Amsterdam (2013).Google Scholar
Menkveld, A. J.“Crowded Trades: An Overlooked Systemic Risk for Central Clearing Counterparties.” Working Paper, VU University Amsterdam (2015).CrossRefGoogle Scholar
Oh, D. H., and Patton, A. J.. “Modeling Dependence in High Dimensions with Factor Copulas.” Journal of Business and Economic Statistics, 35 (2017), 139–154.Google Scholar
Pirrong, C.“The Economics of Clearing in Derivatives Markets: Netting, Asymmetric Information, and the Sharing of Default Risks through a Central Counterparty.” Working Paper, University of Houston (2011).Google Scholar
Poon, S. H.; Rockinger, M.; and Tawn, J.. “Extreme Values Dependency in International Stock Markets: Diagnostics, Models, and Financial Implications.” Review of Financial Studies, 17 (2004), 581–610.CrossRefGoogle Scholar
Slive, J.; Witmer, J.; and Woodman, E.. “Liquidity and Central Clearing: Evidence from the CDS Market.” Journal of Financial Market Infrastructures, 2 (2013), 3–35.Google Scholar
Sourbes, C.“BoE’s Carney: Liquidity Support for CCPs Is a ‘Last-Resort Option.’” Available at https://www.risk.net/regulation/2309908/boes-carney-liquidity-support-ccps-last-resort-option (2013).Google Scholar
TMX Montreal Exchange. “BAX Three-Month Canadian Bankers’ Acceptance Futures Descriptive Brochure.” TMX Group (2013a).Google Scholar
TMX Montreal Exchange. “Government of Canada Bond Futures and Options on Futures Reference Manual.” TMX Group (2013b).Google Scholar
TMX Montreal Exchange. “Index Derivatives Reference Manual.” TMX Group (2013c).Google Scholar
U.S. Department of Treasury. “Financial Regulatory Reform: A New Foundation.” Washington, DC (2009).Google Scholar
Supplementary material: File

Cruz Lopez et al supplementary material

Appendix

Download Cruz Lopez et al supplementary material(File)
File 1 MB