Chairholders:

Christian Gourieroux (CREST and University of Toronto)

Christophe Pérignon (HEC Paris)

A Network of Researchers onRegulation and Systemic Risks

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A Network in the Credit Default Swap Market: Chair Network:

Research Themes(non-exhaustive list)

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(1) Definition and measure of systemic risk (SIFIs)

(2) Regulatory capital

(3) Sources of financial instability

(4) Reserves for solvency and liquidity risks

(5) Real effects of banking and financial regulation

(6) Clearing houses

(7) Estimation risk

(8) Collateral

(9) Contagion

(10) Interconnection of financial institutions

(11) Validation of risk models

(12) Mortality and longevity risk

List of Researchers

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AURAY Stéphane (CREST and ENSAI)CHALLE Edouard (CNRS, Ecole Polytechnique et CREST)DE BANDT Olivier (ACPR)FERMANIAN Jean-David (CREST)FRAISSE Henri (ACPR)GOURIEROUX Christian (CREST and University of Toronto) (chair)HEAM Jean-Cyprien (ACPR and CREST)HURLIN Christophe (University of Orleans)LOISEL Olivier (CREST and ENSAE)MONFORT Alain (University of Maastricht and CREST)PERIGNON Christophe (HEC Paris) (co-chair)RENNE Jean-Paul (Banque de France)THESMAR David (HEC Paris)ZAKOIAN Jean-Michel (CREST)

Associated ResearchersBILLIO Monica (University of Venice)DUBECQ Simon (European Central Bank)GAGLIARDINI Patrick (University of Lugano)JASIAK Joan (York University, Canada)SCAILLET Olivier (University of Geneva)

Research Activities

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• Monthly Seminar on Regulation and Systemic Risks“Basels Accords versus Solvency II: Regulatory Adequacy and Consistency under the Postcrisis Standards”, Caroline Siegel (Université de St Gallen), May 6, 2014

• Conferences“Systemic Risk and Financial Regulation” Conference, July 3-4, 2014, Banque de France. Guest speakers: Darrel Duffie (Stanford) and Robert Engle (NYU)

• Books [2 in 2013]

• Working papers [30 in 2013] and published articles [34 in 2013]

• Presentations at seminars and meetings [>50 in 2013]

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”Derivatives Clearing, Default Risk, and Insurance” Jones and Pérignon (2013)

”CoMargin”, Cruz, Harris, Hurlin, and Pérignon (2014)

[1] How to Make Clearing Houses More Resilient

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CoMargin

• In a physical ETF, investors' money is directly invested in the index constituents.

• In a synthetic ETF, the fund issuer enters into a total return swap with a financial institution which promises to pay the performance of the underlying index.

69% of the ETFs and 35% of AUM in Europe, 100% of leveraged and inverse ETFs in the world

Swap, hence counterparty risk collateral

• Since 2011, allegations made by the Financial Stability Board and IMF about the overall poor quality of ETF collateral.

Massive outflows from synthetic ETFs in 2011-Q3.

89% of investors in the UK state a specific preference for physical ETFs over synthetic ETFs (Morningstar, April 2012).

UCITS rules: 20% max per issuer in collateral portfolio; swap reset

[2] Quantifying the Collateral Risk of ETFs

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“The Collateral Risk of ETFs”, Hurlin, Iseli, Pérignon and Yeung (2014)

Synthetic ETF Structure

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Synthetics: From Allegations to Outflows

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• Study the composition of the $40.9bn collateral portfolio of 164 ETFs managed by the second largest ETF provider in Europe, db x-Trackers.

• For each fund, we know the exact composition of the collateral portfolio every week between July 2012 and November 2012.

• What we do:

(1) Measure the level of collateralization (NAV vs. collateral)

(2) Assess the quality of the collateral (diversification, asset types, liquidity, ratings, correlation with index tracked and swap counterparty)

(3) Estimate the likelihood and the magnitude of a collateral shortfall in a given fund.

(4) Show how to build an optimal collateral portfolio for an ETF.

Low-Quality Collateral? Let’s Have a Look

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A Preview of the Results

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Total Funded UnfundedNumber of ETFs 164 112 52

AUM ($ Mio) Total 37,927 20,122 17,805

Asset Exposure Equities 74.5% (111) 85.5% (100) 61.9% (11)Government Bonds 11.0% (24) 2.2% (2) 20.8% (22)Money Markets 6.6% (4) - 14.0% (4)Commodities 3.8% (2) 7.2% (2) - Hedge Funds Strategies 2.2% (6) 3.9% (3) 0.3% (3)Credits 0.7% (9) - 1.6% (9)Corporate Bonds 0.6% (3) - 1.4% (3)Currencies 0.3% (4) 0.6% (4) - Multi Assets 0.3% (1) 0.6% (1) -

Geographic Exposure Europe 58.9% (79) 29.4% (41) 92.4% (38)World 22.3% (41) 37.0% (38) 5.5% (3)Asia-Pacific 9.4% (28) 17.6% (24) 0.2% (4)North America 7.2% (14) 11.9% (7) 1.9% (7)Rest of the World 2.2% (2) 4.1% (2) -

Size of Collateral Portfolios

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Total Funded UnfundedCollateral Value ($ Mio) All 40,940 23,080 17,860

Number of Collateral Securities All 3,299 3,014 1,141

Average Number of Collateral Securities All 81 110 18per Fund Equities 109 117 35

Government Bonds 14 13 16Money Markets 20 - 20Commodities 93 93 - Hedge Funds Strategies 37 66 9Credits 10 - 10Corporate Bonds 12 - 12Currencies 50 50 - Multi Assets 70 70 -

Collateralization All 108.4% 114.6% 101.3%Equities 109.6% 115.7% 99.9%Government Bonds 102.8% 100.7% 103.1%

Types of Collateral Securities

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Panel A: Type of Collateral Securities All types Equity Gov. Bonds Corp. BondsNumber of Collateral Securities 3,299 2,591 490 218

Asset Exposure All 74.9% 19.7% 5.4%Equity 92.5% 2.7% 4.8%Gov. Bonds - 96.5% 3.5%Corp. Bonds - 100.0% - Others 40.8% 48.8% 10.4%

Panel B: Geographic Origin of the Collateral Securities Europe Asia-Pacific N. America R. WorldGeographic Exposure All 66.0% 17.5% 16.3% 0.2%

Europe 71.8% 13.9% 13.9% 0.4%Asia-Pacific 56.0% 24.1% 19.8% 0.1%N. America 58.3% 22.1% 19.5% 0.1%Rest of the World 58.1% 25.5% 16.3% 0.1%World 58.8% 21.7% 19.4% 0.1%

“home bias“

Bonds Used as Collateral

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Bond issuer

Europe North

America Asia-Pacific Rest of the World Bond Type All 82.2% 6.5% 11.2% 0.1%

Gov. Bonds 69.8% 8.9% 21.3% - Corporate Bonds 91.6% 4.8% 3.5% 0.1%

Rating AAA AA A BBB BB B n/aBond Type All 46.1% 22.1% 15.3% 4.6% 2.9% 0.3% 8.7%

Gov. Bonds 62.9% 22.0% 14.4% 0.6% 0.1% - - Corporate Bonds 34.8% 21.9% 16.2% 7.3% 4.9% 0.5% 14.4%

Bond Issuer Europe 50.5% 17.3% 17.9% 5.4% 1.8% 0.1% 7.0%North America 60.3% 0.2% 0.2% 1.6% 13.5% 3.3% 20.9%Asia Pacific 12.6% 65.4% 5.3% 0.3% 3.8% - 12.6%

Turnover

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Total Funded UnfundedTurnover All 34.0% 47.4% 5.0%

Equities 43.9% 46.5% 18.8%Government Bonds 1.3% 0.5% 1.4%Money Markets 2.2% - 2.2%Commodities 72.7% 72.7% - Hedge Funds Strategies 29.7% 60.7% 0.3%Credits 1.4% - 1.4%Corporate Bonds 2.4% - 2.4%Currencies 60.8% 60.8% - Multi Assets 76.7% 76.7% -

Collateral Shortfall

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Expected Collateral Shortfall (average)

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More information at:

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