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

October 31, 2018

Preview Citation

Format: Chicago

Dermot Turing, and Manmohan Singh. The Morning After--The Impact on Collateral Supply After a Major Default, (USA: International Monetary Fund, 2018) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Banking, Central counterparty clearing house, Collateral, Currencies, Financial crises, Financial institutions, Financial markets, Financial regulation and supervision, Liquidity requirements, Money

Keywords: B. initial margin, Capital requirement, CCPs, Central counterparty clearing house, Class clearing members, Clearing, Collateral, Currencies, Default, Default fund contribution, Derivative trade, Derivatives, Europe, Global, HQLA, Initial margin hike, Initial margin increase, Liquidity, Liquidity coverage ratio, Liquidity coverage requirement, Liquidity requirements, Market participant, Overall-market impact, U.S. dollar, Unreceived variation margin due, Variation margin amount, VMGH, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/228
Stock No:

WPIEA2018228
ISBN:

9781484381922
ISSN:

1018-5941

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