Default risk in futures markets: the customer-broker relationship

Article Abstract:

The traditional view of the futures clearinghouse as an insurer that eliminates the need for customers to evaluate default risk is inaccurate. A clearinghouse member default in 1985 confirms that the clearinghouse only guarantees payment from member to member, not from customer to customer or member to customer. Thus, non-defaulting customers are subject to losses as a result of the action of individuals with whom they have no contractual obligations. This study models the behavior of customers choosing a futures commission merchant (FCM) given the current legal position of the clearinghouse. In a single-period model with symmetric information, customers can eliminate their exposure to defaults of other customers or of their FCM only by choosing to trade through 'boutique' (undiversified) FCMs. In practice, monitoring and rebalancing costs may impede the attainment of zero default risk. However, FCM diversification remains an important factor in customer choice of an FCM. When setting capital requirements, clearinghouse and government regulators need to consider the implications of diversification for both customer and market protection. (Reprinted by permission of the publisher.)

Services, Commodity brokers

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Volatility in wheat spot and futures markets, 1950-1993: government farm programs, seasonality, and causality

Article Abstract:

We explore how wheat spot and futures market volatility has been impacted by government farm programs during the 1950-1993 period. We find that changing volatility in both markets is highly associated with changing farm programs. The mandatory allotment programs of the 1950s and early 1960s (1/3/50-4/10/64) were associated with low volatility, while the voluntary programs initiated in the mid 1960s seem to have induced high volatility (4/11/64-12/22/85). Both market-driven loan rates and conservation reserve programs appear to have helped volatility revert to lower levels since the mid 1980s (12/23/85-12/30/93). We also examine seasonality and causality in conjunction with the farm programs. (Reprinted by permission of the publisher.)

Wheat, Wheat Farming, Futures, Causation, Causation (Philosophy), Agricultural development projects, Agricultural development, Spot market, Seasonal variations (Economics)

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How long do junk bonds spend in default?

Article Abstract:

An analysis of junk bond defaults during the period 1980 to 1991 indicates that there are a number of significant factors that lengthen the default spell. These include the presence of contingent claims and legal action over the allocation of the value of the company. The number of bond classes and whether the debt is publicly held do not seem to represent serious bargaining barriers. It seems that the variation in the length of time junk bonds spend in default is closely connected with bargaining issues. However, this conclusion is not supported by the insignificance of multiple bond classes in the regression.

Junk bonds

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