Optimal clearing margin,capital and price limits for futures clearinghouses |
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| Institution: | 1. Department of Finance, Concordia University, 1455 de Maisonneuve Boulevard, West Montreal, QC, Canada H3G 1M8;2. Department of Mathematics and Statistics, McMaster University, 1280 Main Street West, Hamilton, ON, Canada L8S 4K1;1. School of Economics and Business Administration, Universidad de Navarra, Pamplona, Spain;2. Faculty of Economics, Business and Social Sciences, University of Dortmund, Dortmund, Germany;1. Department of Management, Faculté des sciences de l’administration, Université Laval, Quebec City, Quebec G1V 0A6, Canada;2. Department of Agricultural and Resource Economics, University of California-Davis, Davis, CA 95616, USA;3. Department of Finance, Insurance, and Real Estate, Faculté des sciences de l’administration, Université Laval, Quebec City, Quebec G1V 0A6, Canada;1. The Research Institute of Economics and Management, Southwestern University of Finance and Economics Chengdu, Sichuan 610074, PR China;2. Department of Finance, College of Business, University of Texas at San Antonio, San Antonio, TX 78249, United States;1. Olin Business School, Washington University in St. Louis, United States;2. CAFR, China;3. Robert H. Smith School of Business, University of Maryland, United States |
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| Abstract: | We provide a model for a futures clearinghouse to use for setting optimal levels of clearing margin, capital and price limits, which minimizes the costs to clearing firms and simultaneously protects the clearinghouse from default by clearing firms. We show how to estimate the capital requirement, which supports the clearinghouse’s residual default risk that is not covered by the clearing margin. We apply our model to the Winnipeg Commodity Exchange and demonstrate that price limits reduce the sum of optimal clearing margin and capital to a level that is substantially lower than that required in the absence of price limits. |
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