Working Paper Revision
Central Clearing and Systemic Liquidity Risk
Abstract: By stepping between bilateral counterparties, central counterparties (CCPs) transform credit exposure, thereby improving financial stability. But, large CCPs are concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they require participants to provide cash. Such requirements increase with market volatility; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCPs’ resilience in the rare event that one or more large financial institutions default. Liquidity-focused macroprudential stress tests could help to assess and manage this systemic liquidity risk.
Keywords: Financial systems; Central counterparties; CCPs; Margin; Liquidity risk; Systemic risk; Financial stability; Procyclicality;
JEL Classification: E58; G21; G23; G28; N22;
https://doi.org/10.17016/FEDS.2020.009r1
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File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2020009r1pap.pdf
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2022-05-06
Number: 2020-009r1
Related Works
- Working Paper Revision: Central Clearing and Systemic Liquidity Risk