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Interest rate swaps clearing and systemic risk

Interest rate swaps clearing and systemic risk
Interest rate swaps clearing and systemic risk

We develop a model to analyze distress spillover from the OTC interest rate swaps (IRS) market into the interbank market due to central clearing and margin requirements. We show that margin procyclicality in the OTC IRS market derived by interest rate volatility can lead to the onset of systemic liquidity shortage in the interbank market. We also show that central clearing may increase systemic liquidity risk due to tight margin requirements.

Contagion, Funding liquidity risk, Margin procyclicality, Networks, Systemic risk
1544-6123
Bakoush, Mohamed
09d43d33-abd2-4db0-a26a-2f5831ea0a01
Gerding, Enrico H.
d9e92ee5-1a8c-4467-a689-8363e7743362
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Bakoush, Mohamed
09d43d33-abd2-4db0-a26a-2f5831ea0a01
Gerding, Enrico H.
d9e92ee5-1a8c-4467-a689-8363e7743362
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e

Bakoush, Mohamed, Gerding, Enrico H. and Wolfe, Simon (2019) Interest rate swaps clearing and systemic risk. Finance Research Letters. (doi:10.1016/j.frl.2019.06.016).

Record type: Article

Abstract

We develop a model to analyze distress spillover from the OTC interest rate swaps (IRS) market into the interbank market due to central clearing and margin requirements. We show that margin procyclicality in the OTC IRS market derived by interest rate volatility can lead to the onset of systemic liquidity shortage in the interbank market. We also show that central clearing may increase systemic liquidity risk due to tight margin requirements.

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Bakoush et al 2019 AM - Accepted Manuscript
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Accepted/In Press date: 29 June 2019
e-pub ahead of print date: 29 June 2019
Keywords: Contagion, Funding liquidity risk, Margin procyclicality, Networks, Systemic risk

Identifiers

Local EPrints ID: 433074
URI: http://eprints.soton.ac.uk/id/eprint/433074
ISSN: 1544-6123
PURE UUID: 807c6d23-54bf-4ec4-b36f-1e937849d822
ORCID for Mohamed Bakoush: ORCID iD orcid.org/0000-0001-9624-9828
ORCID for Enrico H. Gerding: ORCID iD orcid.org/0000-0001-7200-552X
ORCID for Simon Wolfe: ORCID iD orcid.org/0000-0001-9815-9535

Catalogue record

Date deposited: 07 Aug 2019 16:30
Last modified: 29 Jun 2020 04:01

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