The other paper awarded the price is by Guillaume Vuillemey and is forthcoming in the Journal of Finance. The
Value of Central Clearing assesses the effect of the first Central Clearing Counterparty House (CCP) in 1882 in Le Havre for coffee futures. This new contractual institution allowed coffee traders to insulate themselves against counterparty
risk. The effect on coffee trade were significant, with more coffee imports channelled through Le Havre, even if subsequently sold to other European countries. There was also a smoothing effect on coffee consumption! Guillaume shows that the CCP
helped complete the market, both reducing asymmetric information between traders and offering insurance against counterparty default (as this is taken by the CCP). The success of this first CCP was soon replicated in other European exchanges. This quite insightful
historic study shows that financial innovations such as a clearing house can have positive effects on the real economy. After the Global Financial Crisis there was another global push to bring more derivatives onto CCPs, though this was mostly
for transparency and stability reasons. However, one important lesson from this and one of Guillaume’s other papers is that high equity, high margin requirements, and good governance are critical for the success of a CCP – in a paper with Vincent Bignon, published in the Review of Finance (with me as responsible editor) he analyses the failure of a CCP for sugar futures in Paris in 1974, related to poor risk management and weak governance structures.