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Cambridge Finance Workshop - Gerardo Ferrara

Gerardo Ferrara, Ph.D., Economist | Market Behaviour & Activities Team | Capital Markets Division, Bank of England
When Oct 17, 2019
from 01:00 PM to 02:00 PM
Where Castle Teaching Room, Cambridge Judge Business School
Contact Name
Contact Phone 01223768129
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TITLE: Simulating liquidity stress in the derivatives market

AUTHORS: Marco Bardoscia, Gerardo Ferrara, Nicholas Vause and Michael Yoganayagam

Bank of England, Threadneedle St, London EC2R 8AH, UK



We investigate whether margin calls between derivative counterparties could strain their ability to pay and thereby spread liquidity stress through the market.

Using trade repository data on derivative portfolios, we simulate variation margin calls in a stress scenario and compare these with institutions' liquid-asset buffers.

Where these buffers are insufficient to meet the margin calls we assume institutions borrow the shortfall, but only at the last moment when payment is due. We find that liquidity shortfalls are only a modest proportion of average daily cash borrowing in repo markets. Additionally, only a small part of those liquidity shortfalls could be avoided if payments were centrally coordinated, for example by a regulator that directed institutions in distress to make partial payments. That said, our methodology could be used regularly to investigate whether margin calls could generate systemic liquidity strains. If that were the case, additional liquidity requirements targeted at institutions that spread liquidity stress would reduce potential liquidity shortfalls most effectively.


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