The Morning After--The Impact on Collateral Supply After a Major Default

Dermot Turing and Manmohan Singh

No 2018/228, IMF Working Papers from International Monetary Fund

Abstract: Changes to the regulatory system introduced after the financial crisis include not only mandatory clearing of OTC derivatives at central counterparties and margining of uncleared derivatives, but also prudential measures, including notably a “Liquidity Coverage Ratio” which obliges firms to set aside high-quality liquid assets (HQLA) as a stopgap against anticipated cash outflows. We examine factors which may affect the demand for HQLA in a severely stressed market following a hypothetical default of a major clearing member. Immediately following a major default, the amount of HQLA demanded by the whole market would spike. We estimate the size of the spike and draw conclusions as to whether the depth of the market is adequate to absorb it.

Keywords: WP; U.S. dollar; liquidity coverage requirement; class clearing members; derivative trade; initial margin increase; market participant; unreceived variation margin due; variation margin amount; HQLA; clearing; liquidity; derivatives; default; CCPs; liquidity coverage ratio; VMGH; initial margin hike; capital requirement; overall-market impact; default fund contribution; B. initial margin; Collateral; Central counterparty clearing house; Liquidity requirements; Currencies; Global; Europe (search for similar items in EconPapers)
Pages: 26
Date: 2018-10-31
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