Gerardo Ferrara

Seminar

Summary
Date: 
October 21st 2019

Time: 1.00 - 2.00pm Venue: Room 3.21, Old Building, LSE (map)
Speaker: Gerardo Ferrara (Bank of England)
Seminar Title: Stimulating liquidity stress in the derivatives market

Abstract: We investigate whether margin calls on derivative counterparties could exceed their available liquid assets and, by preventing immediate payment of the calls, spread such liquidity shortfalls through the market. Using trade repository data on derivative portfolios, we simulate variation margin calls in a stress scenario and compare these with the liquid-asset buffers of the institutions facing the calls. Where buffers are insufficient we assume institutions borrow additional liquidity to  over the shortfalls, but only at the last moment when payment is due. Such delays can force recipients to borrow more than otherwise, and so liquidity shortfalls  can grow in aggregate as they spread through the network. However, we  find an aggregate liquidity shortfall equivalent to only a small fraction of average daily  cash borrowing in international repo markets. Moreover, we  find that only a small part of this aggregate shortfall could be avoided if payments were coordinated  centrally.