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.