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Risk-based clearing has been proposed by Rausser et al. (2010) for over-the-counter (OTC) derivatives. This paper aims to illustrate the application of risk-based margins to a case study of the mortgage-backed securities derivative portfolio of the American International Group (AIG) during the period 2005-2008. There exists sufficient publicly available information to examine AIG’s derivative portfolio and how that portfolio would depend on conjectural changes in margin requirements imposed on its OTC derivative positions. Generally, such data on OTC derivative portfolio positions are unavailable in the public domain, and thus, the AIG data provide a unique opportunity for an objective evaluation.

This paper uses modern financial methodology to evaluate risk-based margining and collateralization for the major OTC derivative portfolio of the AIG.

This analysis reveals that a risk-based margin procedure would have led to earlier margin calls of greater magnitude initially than the collateral calls actually faced by AIG Financial Products (AIGFP). The total margin ultimately required by the risk-based procedure, however, is similar in magnitude to the collateral calls faced by AIGFP by August 2008. It is likely that a risk-based clearing procedure applied to AIG’s OTC contracts would have led to the AIG undertaking significant hedging and liquidation of their OTC positions well before the losses built up to the point they had, perhaps avoiding the federal government’s orchestrated restructuring that occurred in September 2008.

There has been no published risk-based evaluations of a major OTC portfolio of derivatives for any company, let alone the AIG.

In class action antitrust litigation, the standards for acceptable economic analysis at class certification have continued to evolve. The most recent event in this evolution is the United States Supreme Court’s decision in Comcast Corp. v. Behrend, 133 S. Ct. 1435 (2013). The evolution of pre-Comcast law on this topic is presented, the Comcast decision is thoroughly assessed, as are the standards for developing reliable economic analysis. This article explains how economic evidence of both antitrust liability and damages ought to be developed in light of the teachings of Comcast, and how liability evidence can be used by economists to support a finding of common impact for certification purposes. In addition, the article addresses how statistical techniques such as averaging, price-dispersion analysis, and multiple regressions have and should be employed to establish common proof of damages.

The lens used by the courts and much of the antitrust literature on predatory selling and/or buying is based on partial equilibrium methodology. We demonstrate that such methodology is unreliable for assessments of predatory monopoly or monopsony conduct. In contrast to the typical two-stage dynamic analysis involving a predation period followed by a recoupment period, we advance a general equilibrium analysis that demonstrates the critical role of related industries and markets. Substitutability versus complementarity of both inputs and outputs is critical. With either monopolistic or monopsonistic market power (but not both), neither predatory overselling nor predatory overbuying is profitably sustainable. Two-stage predation/recoupment is profitable only with irreversibility in production and cost functions, unlike typical estimated forms from the production economic literature. However, when the market structure admits both monopolistic and monopsonistic behavior, predatory overbuying can be profitably sustainable while overselling cannot. Useful distinctions are drawn between contract versus non-contract markets for input markets.

Systemic risk propagated through over‐the‐counter (OTC) derivatives can best be managed by a public‐private central counterparty clearing house. The purpose of this paper is to outline the market microstructure necessary for such a clearing house.

The paper proposes using an request for quote platform with an active permissioning system that uses analytic approximations based on Monte Carlo simulation to estimate default risk and a two‐part pricing scheme to efficiently price that risk.

It is found that comprehensive clearing for complex and standardized derivatives is feasible using the clearing framework.

This research is limited by the authors' ability to give empirical examples. The paper gives a short example with data, but given the constraints on length, cannot go into more detail.

This comprehensive clearing structure, in contrast to current proposed government regulations, will not drive out the “good” with the “bad” OTC derivative instruments.

This is the only paper the authors are aware of that outlines a detailed framework for clearing all OTC derivatives.

In the earlier part of the twentieth century, cost–benefit (CBA) or benefit–cost analysis was used as a vehicle by Congress to curtail its wasteful spending, by using the Army Corp of Engineers to examine Congressional projects using CBA. Theodore Porter here examines the rise of the use of CBA in historical context and finds that the Corp was highly successful in reducing wasteful spending. Regardless of the present day effectiveness of the Corps, CBA currently provides valuable service. To appreciate this one need look no further than the effect Arnold Harberger's work and students have had in less developed countries, and at the several hundred useful evaluations of social programs produced over the last several years. Finally, one can look, criticisms of Ackerman and Heinzerling notwithstanding, at many of the analyses of environmental programs.