Liquidation Process Optimisation and Swing Option

After the default of Lehman Brother, the credit risk became a first concern. Following the Euro crisis, the regulators were pushy for clearing i.e. the market participants were forced via the regulatory capital constraints to go to the exchange or the central clearing house. It was the beginning of the end of the Over The Counter (OTC) derivatives. Many authors warned about the fact that the OTC is a necessary complement of the Exchange system. Indeed, these decisions impose a need for liquidity which will be in favor of few participants. Kamtchueng did a note concerning the parallel with the Repo market. It will create a clear monopoly, end of innovation and any introduction to new market participants. Therefore the freezing market will be driven by few participants without need of risk appetite but more willing to find a profitable consensus (comparable to the French Telecom Operators agreement condemned in 2005).Nevertheless it is important to understand (and not underestimate) the liquidation process. The clearing process has been described in Kamtchueng (2015), In this paper, we will be focus on the collateral account liquidation process and the link to the Swing Option.Our results are also related to risk management or liquidator agent intervention, indeed the way the portfolio is liquidated will impact the final position value. As a reminder the Societe General management board decided to liquidate J.Kerviel position on 3 days (from the January 21 2008) with the dominant agent position against them. On the risk side, we also can challenge the number of liquidation days proposed by the regulators. Effectively our Peak Future Exposure can be at a scenario level no 'liquidable' on δ days (δ = 5, 10, 20)