- 16 December 2022
- WORKING PAPER SERIES - No. 2756The impact of derivatives collateralisation on liquidity risk: evidence from the investment fund sectorDetails
- 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
- 26 May 2020
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 1, 2020Details
- 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.
- 23 September 2019
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 6, 2019Details
- Data on derivatives transactions have recently become available at a number of central banks, including the ECB, and have opened up new avenues for analysis. Collected as a result of reforms of the over-the-counter (OTC) derivatives market, which were primarily designed to counter systemic risk, the data have numerous applications beyond the domain of financial stability. This article presents two such applications. It demonstrates how data gathered under the European Market Infrastructure Regulation (EMIR) can be used to better understand two types of derivatives market that are of particular importance for central bank analysis, namely the interest rate derivatives and inflation-linked swap markets. For the interest rate derivatives market, the article shows how investor expectations for interest rates may be inferred through “positioning indicators” that track how a set of “informed investors” take positions in the market in anticipation of future interest rate movements. Such quantity-based indicators can complement other, more established indicators of interest rate expectations, such as forward rates or survey-based measures. For euro area inflation-linked swap markets, the article exploits the fact that EMIR data allow a first systematic look at trading activity in these markets, which can provide valuable and timely information on investors’ inflation expectations. It highlights a number of structural features of activity in these markets and discusses their possible implications for the monitoring of market-based measures of inflation compensation.
- JEL Code
- G10 : Financial Economics→General Financial Markets→General
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates