The Morning After--The Impact on Collateral Supply after a Major Default
27 Pages Posted: 10 Dec 2018
Date Written: October 2018
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: Liquidity, Default, International financial markets, HQLA, clearing, derivatives, CCPs, liquidity coverage ratio, VMGH, initial margin, International Monetary Arrangements and Institutions, Corporation and Securities Law, Government Policy and Regulation
JEL Classification: G21, G23, F33, K22, G18, G15, G28
Suggested Citation: Suggested Citation