Staff Working Paper No. 838
By Marco Bardoscia, Gerardo Ferrara, Nicholas Vause and Michael Yoganayagam
We investigate whether margin calls on derivative counterparties could exceed their available liquid assets and, by preventing immediate payment of those 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 them with the liquid-asset buffers of the institutions facing the calls. Where buffers are insufficient we assume institutions borrow additional liquidity to cover the shortfalls, but only after waiting as long as possible to receive payments before making their own. 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 modest 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 partial payments were allowed and co-ordinated by an external authority.
This version was updated in December 2020.