The Morning After--The Impact on Collateral Supply After a Major Default
IMF Working Papers, October 31, 2018
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Bibliographic details
- Authors: Dermot Turing, Manmohan Singh
- Published: October 31, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484381922.001
Overview and research focus
- Examines factors affecting demand for high-quality liquid assets (HQLA) in a severely stressed market following a hypothetical default of a major clearing member.
- Context: post-financial-crisis regulatory changes including mandatory clearing of OTC derivatives at central counterparties, margining of uncleared derivatives, and prudential measures notably the “Liquidity Coverage Ratio” which obliges firms to set aside HQLA as a stopgap against anticipated cash outflows.
- Authors: Dermot Turing, Manmohan Singh.
- Publication date: October 31, 2018.
- Publication type: IMF Working Papers, Working Paper No. 2018/228, Pages: 26, Volume: 2018, Issue: 228, DOI: https://doi.org/10.5089/9781484381922.001, Stock No: WPIEA2018228, ISBN: 9781484381922, ISSN: 1018-5941.
Key findings and empirical conclusions
- Immediately following a major default, the amount of HQLA demanded by the whole market would spike.
- The study estimates the size of the spike and draws conclusions as to whether the depth of the market is adequate to absorb it.
- The analysis focuses on market-wide demand dynamics for HQLA under severe stress scenarios tied to a major clearing member default.
Analytical themes and mechanisms examined
- Interaction of mandatory central clearing and margining practices with prudential liquidity requirements (Liquidity Coverage Ratio).
- Transmission channels from a clearing member default to aggregate HQLA demand, including margin calls and default-related cash outflows.
- Market depth considerations for HQLA instruments in the face of a concentrated, immediate surge in demand.
Policy implications and considerations (as framed by the paper)
- Monitoring adequacy of HQLA supply and market depth to absorb abrupt, large spikes in demand triggered by defaults of major clearing members.
- Consideration of systemic implications of combined post-crisis reforms (mandatory clearing, margining, LCR) under stress scenarios.
- Relevance for regulators and market participants in assessing resilience of liquidity buffers and the effectiveness of HQLA frameworks during extreme events.
Subjects and keywords (as provided)
- 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.
IMF Working Paper: "The Morning After--The Impact on Collateral Supply After a Major Default", Dermot Turing and Manmohan Singh, October 31, 2018.