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

27 Pages Posted: 10 Dec 2018

See all articles by Dermot Turing

Dermot Turing

Kellogg College, Oxford

Manmohan Singh

International Monetary Fund (IMF)

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

Turing, Dermot and Singh, Manmohan, The Morning After--The Impact on Collateral Supply after a Major Default (October 2018). IMF Working Paper No. 18/228, Available at SSRN: https://ssrn.com/abstract=3297647

Dermot Turing

Kellogg College, Oxford ( email )

60-62 Banbury Road
Oxford, OX2 6PN
United Kingdom

Manmohan Singh (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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