We present CoMargin, a new methodology to estimate collateral requirements in derivatives central counterparties (CCPs). CoMargin depends on both the tail risk of a given market participant and its interdependence with other participants. Our approach internalizes trading externalities and enhances the stability of CCPs, thus reducing systemic risk concerns. We assess our methodology using proprietary data from the Canadian Derivatives Clearing Corporation that include daily observations of the actual trading positions of all of its members from 2003 to 2011. We show that CoMargin outperforms existing margining systems by stabilizing the probability and minimizing the shortfall of simultaneous margin-exceeding losses.
We thank the Canadian Derivatives Clearing Corporation (CDCC) for providing us with the data used in this paper. We are very grateful to the Chair L’Autorité de Contrôle Prudentiel et de Résolution (ACPR)/Risk Foundation: Regulation and Systemic Risk, the Dauphine-Amundi Chair in Asset Management, and the Montreal Institute of Structured Products and Derivatives (Institut de la Finance Structurée et des Instruments Dérivés de Montréal, or IFSID) for funding and supporting our research. We appreciate the time and support provided by Nikil Chande, Scott Hendry, Nicholas Labelle St-Pierre, and Jonathan Witmer. We thank an anonymous referee, Andrew Barton, Hendrik Bessembinder (the editor), Mark Chambers, Pierre Collin-Dufresne, Darrel Duffie, Christian Gourieroux, Nicholas Linder, Anthony Lynch, Serafin Martinez-Jaramillo, Albert Menkveld, Gustavo Schwenkler, Guillaume Vuillemey, Anne Wetherilt, Haoxiang Zhu, seminar participants at the Bank of England, Bank of Japan, Banque de France, Banco de Mexico, Boston University, French Prudential Supervisory and Resolution Authority (ACPR), Global Risk Institute, and the Reserve Bank of Australia, as well as the participants of the 2013 Annual Workshop of the Dauphine-Amundi Chair in Asset Management, the 2014 IFSID Conference on Derivatives, the 2014 Society for Financial Econometrics (SOFIE) Conference on Systemic Risk, the 2015 American Finance Association meeting, Bank of Canada Financial Intermediation and Market Dynamics Workshop, the 2011 Australasian Finance and Banking Conference, and the QUT-Princeton Frontiers in Financial Econometrics Workshop for their valuable comments.
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