Margin Setting in Credit Derivatives Clearing Houses

Research output: Contribution to journalArticlepeer-review

Abstract

The possible benefits of introducing central counterparties, or clearing houses, in the credit derivatives market is currently intensively debated among bankers and policymakers. The exact outcome of this discussion is not yet clear but regardless of how any eventual clearing is organized the actual clearing house needs to be properly capitalized and needs to maintain accurate margin (collateral) levels. In this article we therefore discuss how extreme value theory can be used to compute margin levels for such a clearing house. We present some evidence of credit derivatives price change distributions being significantly non-normal, and margins based on extreme value theory are found to be more accurate than those based on normal or historical distributions, particularly at more conservative margin levels.
Original languageEnglish
Pages (from-to)37-43
JournalJournal of Fixed Income
Volume19
Issue number4
DOIs
Publication statusPublished - 2010

Subject classification (UKÄ)

  • Economics

Keywords

  • extreme value theory
  • clearing house
  • central counterparty
  • margin
  • credit derivative
  • OTC
  • iTraxx

Fingerprint

Dive into the research topics of 'Margin Setting in Credit Derivatives Clearing Houses'. Together they form a unique fingerprint.

Cite this