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Law as a constraint on bailouts: Emergency support for central counterparties

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  • France, Virginia G.
  • Kahn, Charles M.

Abstract

Increased awareness of the importance of non-bank financial infrastructures has brought increased concern about the potential for bailouts and the resultant moral hazard problem. This paper examines the question with regard to derivatives central counterparties. We consider the layers of protection that derivatives central clearing parties (CCPs) have established in the absence of an expectation of regulatory rescue. We then provide a model of the tension between the desire for ex post rescue of a systemically important financial infrastructure and the desire to maintain ex ante discipline on the infrastructure. The model illustrates the factors that should lead to relaxation or tightening of the financial regulator's discretion for rescue. We consider examples of failures of derivatives CCPs in order to highlight the importance of these considerations.

Suggested Citation

  • France, Virginia G. & Kahn, Charles M., 2016. "Law as a constraint on bailouts: Emergency support for central counterparties," Journal of Financial Intermediation, Elsevier, vol. 28(C), pages 22-31.
    • Handle: RePEc:eee:jfinin:v:28:y:2016:i:c:p:22-31
    DOI: 10.1016/j.jfi.2016.08.005
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    References listed on IDEAS

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    4. Robert S. Steigerwald, 2015. "Central Counterparty Clearing and Systemic Risk Regulation," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 7, pages 181-246, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Paddrick, Mark & Young, H. Peyton, 2021. "How safe are central counterparties in credit default swap markets?," LSE Research Online Documents on Economics 101170, London School of Economics and Political Science, LSE Library.
    2. Mark Paddrik & H. Peyton Young, 2017. "How Safe are Central Counterparties in Derivatives Markets?," Working Papers 17-06, Office of Financial Research, US Department of the Treasury.
    3. Vincent Bignon & Guillaume Vuillemey, 2020. "The Failure of a Clearinghouse: Empirical Evidence [Counterparty risk externality: centralized versus over-the-counter markets]," Review of Finance, European Finance Association, vol. 24(1), pages 99-128.
    4. Cyril Monnet & Thomas Nellen, 2021. "The Collateral Costs of Clearing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 939-970, August.
    5. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Other publications TiSEM 1f3bd844-92ab-4104-8f57-9, Tilburg University, School of Economics and Management.
    6. Edoardo Gaffeo & Mauro Gallegati & Lucio Gobbi, 2022. "Endogenous clearinghouse formation in payment networks," Review of Evolutionary Political Economy, Springer, vol. 3(1), pages 109-136, April.
    7. Chirinko, Robert, 2023. "What went wrong? The Puerto Rican debt crisis, the “Treasury Put,” and the failure of market discipline," Journal of Corporate Finance, Elsevier, vol. 80(C).
    8. Calomiris, Charles W. & Tsoulouhas, Theofanis, 2022. "Bailing out conflicted sovereigns," Journal of Financial Intermediation, Elsevier, vol. 51(C).
    9. H Peyton Young & Mark Paddrik, 2019. "How Safe are Central Counterparties in Credit Default Swap Markets?," Economics Series Working Papers 885, University of Oxford, Department of Economics.
    10. Ron Berndsen, 2021. "Fundamental questions on central counterparties: A review of the literature," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 2009-2022, December.

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