Crowded Trades: An Overlooked Systemic Risk for Central Clearing Counterparties

Albert Menkveld

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Counterparty default risk might hamper trade and trigger a financial crisis. The introduction of a central clearing counterparty (CCP) benefits trading but pushes systemic risk into CCP default. Standard risk management strategies at CCPs currently overlook a risk associated with crowded trades. This paper identifies it, measures it, and proposes a margin methodology that accounts for it. The application to actual CCP data illustrates that this hidden risk can become large, in particular at times of high CCP risk.

Keywords: Financial; economics (search for similar items in EconPapers)
JEL-codes: G00 (search for similar items in EconPapers)
Date: 2014-06-02
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20140065

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