XXV Edition

1-2 December 2016"

Systemic Risk in Clearing Houses: Evidence from the European Repo Market

Derrien Francois, HEC Paris
Boissel Charles, HEC Paris
Örs Evren, HEC Paris
Thesmar David, HEC Paris

Do crises affect Central Clearing Counterparties (CCPs)? We focus on a large and safe segment of CCP-cleared repo market during the Eurozone sovereign debt crisis. We develop a simple model to infer CCP stress, which is measured as repo rates’ sensitivity to sovereign CDS spreads and jointly captures (1) the effectiveness of haircut policies, (2) CCP-member default risk (conditional on sovereign default), and (3) CCP default risk (conditional on both sovereign and CCP-member default). During 2011, repo rates strongly respond to sovereign risk, particularly for GIIPS countries: repo investors behaved as if the conditional probability of CCP default was substantial.

Area: Financial Stability

Keywords: repurchase agreement; sovereign debt crisis; LTRO; secured money market lending; clearing houses

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