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Audrius Jukonis

16 December 2022
WORKING PAPER SERIES - No. 2756
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Abstract
Stricter derivative margin requirements have increased the demand for liquid collateral but euro area investment funds which use derivatives extensively have been reducing their liquid asset holdings. Using transaction-by-transaction derivatives data, we assess whether the current levels of funds’ holdings of cash and other highly liquid assets would be adequate to meet funds’ liquidity needs to cover variation margin calls on derivatives under a range of stress scenarios. The estimates suggest that between 13% and 33% of euro area funds with sizeable derivatives exposures may not have sufficient liquidity buffers to meet the calls. As a result, they are likely to redeem MMF shares, procyclically sell assets and draw on credit lines, thus amplifying the market dynamics under such stress scenarios. Our findings highlight the importance of further work to assess the potential role of macroprudential policies for non-banks, particularly regarding liquidity risk in funds.
JEL Code
C60 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→General
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation
16 September 2022
WORKING PAPER SERIES - No. 2722
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Abstract
Market participants use leveraged derivatives to gain access to equity market exposure through broker banks. Leverage and interconnectedness via overlapping portfolios of dealer banks can amplify adverse market movements, potentially causing sizeable losses. I propose a model, based on granular data, to simulate losses from a banks’ trading book in case of an adverse market scenario. Following a move in asset prices, banks mark their positions and issue margin calls; some (leveraged) counterparties fail to pay their margins, forcing banks to liquidate their positions causing a pressure on asset prices due to market impact. The impact is amplified because of the leverage and when counterparties are exposed to multiple banks over the same underlying. I employ the model to assess current capital and margin rules in covering risks from broker’s exposure to highly leveraged clients.
JEL Code
C60 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→General
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation
26 May 2020
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 1, 2020
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Abstract
Stricter margining requirements for derivative positions have increased the demand for collateral by market participants in recent years. At the same time, euro area investment funds which use derivatives extensively have been reducing their liquid asset holdings. Using transaction-by-transaction derivatives data, this special feature assesses whether the current levels of funds’ holdings of cash and other highly liquid assets would be adequate to meet funds’ liquidity needs to cover variation margin calls on derivatives during stressed market periods, once the derivative portfolios become fully collateralised. The evidence so far indicates that euro area funds were able to meet the fivefold increase in variation margin during the height of the coronavirus-related market stress. But some of them were likely to have done so by engaging in repo transactions, selling assets and drawing on credit lines, thus amplifying the recent market dynamics.
29 October 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 9
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Abstract
Initial margin (IM) reduces counterparty credit risk in derivative markets. Notwithstanding efforts to limit potential procyclical effects of IM-setting practices, there is an ongoing debate about whether the current framework sufficiently addresses this concern, in particular when Value-at-Risk (VaR) models are used for setting IM. This article provides further insights into this issue. First, using EMIR data, we provide an overview of outstanding IM in the euro area derivative market and identify the most relevant sectors for the exchange of IM. Second, using a VaR IM model in line with industry practice, we show that aggregate IM can potentially vary substantially over a long-term horizon. Finally, we show that an IM floor based on a standardised IM model could be an effective tool for reducing IM procyclicality.
JEL Code
G10 : Financial Economics→General Financial Markets→General
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation