The paradox of Margin Requirements : Systemic liquidity risk and procyclicality
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2018-08-31
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en
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After the financial crisis of 2008, regulators imposed tight regulations forcing OTC derivatives to be traded through CCP (Central Counter Party). Despite this central institution reduces counterparty credit risk of market participants by means of margin requirements, there is a growing concern which shows that margins requirements could increase procyclicality (Glasserman 2017) and liquidity risk (Bakoush 2018). Although margins serve to avoid that the counterparty fails, margin calls requires participants to add extra liquidity as collateral in a short-time constraint forcing market participants to fire sale the assets available in a “thin market”. Those peculiar conditions affect volatility which could lead again to margin calls. Furthermore, the study investigates the imbalance of the demand and supply of high-quality collateral overtime. The liquidity risk consists in the collateral scarcity which cannot grow at the same pace of the demand (Levels 2012; Baranova 2016). If the demand of high-quality collateral overcomes the supply, banks and financial institutions could encounter difficulties in finding collateral for backing up their financial transactions in the interbank market. Firstly, the results of this paper show that higher margin requirements do not lead to higher volatility, increasing procyclicality risk. Secondly, the study reports none liquidity risk underlying that margin requirements have a minimal impact on the imbalance of demand and supply of high-quality collateral.
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Faculteit der Managementwetenschappen