Crowded positions: An overlooked systemic risk for central clearing parties

Albert J. Menkveld

doi:10.1093/rapstu/rax016

Crowded positions: An overlooked systemic risk for central clearing parties

Albert J. Menkveld^*

^*Corresponding author for this work

Research output: Contribution to Journal › Article › Academic › peer-review

Abstract

Counterparty risk could hamper trade and worsen a financial crisis. A central clearing party (CCP) insures traders against counterparty default and thus benefits trade. Default of the CCP however becomes a new systemic risk. CCP risk management does not account for risks associated with crowded positions. This paper proposes a CCP exposure measure based on tail risk in trader portfolios. It identifies and measures crowded risk and assigns it to traders according to the polluter pays principle. CCP data show that crowded positions increase CCP exposure most (about one-third) on turbulent days, when exposure is high already.

Original language	English
Pages (from-to)	209-242
Number of pages	34
Journal	Review of Asset Pricing Studies
Volume	7
Issue number	2
DOIs	https://doi.org/10.1093/rapstu/rax016
Publication status	Published - 1 Jan 2017

Funding

I thank Matthieu Bouvard, Johannes Breckenfelder, Hans Degryse, Darrell Duffie, Thierry Foucault, Wenqian Huang, Vincent van Kervel, Péter Kondor, Phillip Monin, Marco Pagano, Andreas Park, Michael Robles, Sasha Rozenburg, Arnoud Siegmann, Wolf Wagner, Bart Yueshen, and Marius Zoican and seminar/conference participants at ABN AMRO, French Prudential Supervisory Authority at Banque de France, ABN AMRO, AFA, Dutch Central Bank, Dutch Tax Administration, U.S. Commodity Futures Trading Commission, Dutch Ministry of Finance, European Central Bank, EuroCCP, U.S. Securities and Exchange Commission, and Society for Financial Econometrics for comments. I am grateful to European Multilateral Clearing Facility (EMCF) and to NYU V-Lab for making data available. I further gratefully acknowledge VU University Amsterdam for a VU talent grant and NWO for a Vidi grant. Send correspondence to Albert J. Menkveld, Vrije Universiteit Amsterdam, FEWEB, De Boelelaan 1105, 1081 HV Amsterdam, the Netherlands; telephone: +31 20 598 6130; e-mail: [email protected].

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 10 Reduced Inequalities
SDG 17 Partnerships for the Goals

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Crowded positions: An overlooked systemic risk for central clearing parties

Abstract

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UN SDGs

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