Clearinghouse interdependence made a single default able to collapse the whole exchange

Evidence

Nowhere was the trauma more sharply felt than in the CBOE and the Merc. The unprecedented market movements called for huge sums of collateral to change hands, and there was a very real fear that major participants would be unable to meet their obligations. Clearers inherited the obligations of those for whom they cleared; if one clearer failed, the others became responsible for its debts; if they could not honor them, the entire clearing system, and thus the exchange, would collapse. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 159

Categorization

• XREF: The mutualization-of-default-clearing structure prefigures systemic-risk and contagion arguments later formalized in network finance theory. — connects to: Clearinghouse mutualization makes a single member’s failure a system-wide contagion risk.; Security design boosted cross-market correlation and turned local losses into systemic collapse. — Mark Blyth, Austerity: The History of a Dangerous…, 96; Clearinghouse settlement failure alone could have triggered a cascade of 1987 bankruptcies

Broader Connections

• Clearinghouse mutualization makes a single member’s failure a system-wide contagion risk. #expands (0.92)
• Clearinghouse settlement failure alone could have triggered a cascade of 1987 bankruptcies #corroborates (0.78)
• Security design boosted cross-market correlation and turned local losses into systemic collapse. #qualifies (0.75) — Mark Blyth, Austerity, 96