Margin Setting in Credit Derivatives Clearing Houses
Author
Summary, in English
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.
Department/s
Publishing year
2010
Language
English
Pages
37-43
Publication/Series
Journal of Fixed Income
Volume
19
Issue
4
Document type
Journal article
Publisher
Portfolio Management Research
Topic
- Economics
Keywords
- extreme value theory
- clearing house
- central counterparty
- margin
- credit derivative
- OTC
- iTraxx
Status
Published
ISBN/ISSN/Other
- ISSN: 1059-8596