CCP failures: a rare but present danger

BIS Quarterly Review  |  December 2018  | 
16 December 2018

(Extract from page 86 of BIS Quarterly Review, December 2018)

CCP failures are few and far between. There have been only three such instances over the last 50 years: the French Caisse de Liquidation des Affaires et Marchandises in 1974,icon the Kuala Lumpur Commodity Clearing House in 1983, and the Hong Kong Futures Guarantee Corporation in 1987.icon These episodes have some elements in common. First, all three CCPs cleared long-dated derivatives contracts. Second, the weeks before the failure saw unusually high volatility in the underlying asset price. Third, unmet margin calls by the clearing members triggered the failure.

There have also been a number of near-failures associated with periods of market stress (IMF (2010)). In the wake of the October 1987 equity market crash, both the Chicago Mercantile Exchange and the Options Clearing Corporation met with difficulties in receiving the required margin increases from their members. Brazil's BM&F CCP almost failed in 1999 after a devaluation of the Brazilian real caused two clearing members to default.

In some cases, CCPs have come under stress in relatively benign market conditions. In December 2013, a Korean CCP dipped into its mutualised default fund after one of its members - a small broker-dealer - defaulted because of a trading error. The surviving clearing members absorbed more than $40 million in losses by replenishing the fund. The more recent case of Nasdaq Clearing AB is discussed in Box A.

Together, these episodes highlight the fact that, while CCPs are designed for safety, they can fail. Preventing and managing these eventualities is the key motivation for the extensive work by regulators to put in place viable recovery and resolution plans (CPSS-IOSCO (2012), CPMI-IOSCO (2017), and FSB (2014, 2017)).

icon Bignon and Vuillemey (2017) set out a detailed exposition of the events around the CLAM failure. icon In October 1987, the HKFGC defaulted and remained closed for four days, before being bailed out by the government with an injection of HK$ 1 billion. See the Davison Report (1988) for more details.