Interest rate swaps clearing and systemic risk

Mohamed Bakoush, Enrico H. Gerding and Simon Wolfe

Finance Research Letters, 2020, vol. 33, issue C

Abstract: We develop a model to analyze distress spillover from the OTC interest rate swaps (IRS) market into the interbank market due to central clearing and margin requirements. We show that margin procyclicality in the OTC IRS market derived by interest rate volatility can lead to the onset of systemic liquidity shortage in the interbank market. We also show that central clearing may increase systemic liquidity risk due to tight margin requirements.

Keywords: Margin procyclicality; Funding liquidity risk; Systemic risk; Contagion; Networks (search for similar items in EconPapers)
JEL-codes: G15 G21 G28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:33:y:2020:i:c:s1544612318305208

DOI: 10.1016/j.frl.2019.06.016

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