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Interest rate swaps clearing and systemic risk

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  • Bakoush, Mohamed
  • Gerding, Enrico H.
  • Wolfe, Simon

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.

Suggested Citation

  • Bakoush, Mohamed & Gerding, Enrico H. & Wolfe, Simon, 2020. "Interest rate swaps clearing and systemic risk," Finance Research Letters, Elsevier, vol. 33(C).
    • Handle: RePEc:eee:finlet:v:33:y:2020:i:c:s1544612318305208
    DOI: 10.1016/j.frl.2019.06.016
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    References listed on IDEAS

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    Cited by:

    1. Dávid Zoltán Szabó & Kata Váradi, 2022. "Margin requirements based on a stochastic correlation model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(10), pages 1797-1820, October.

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    More about this item

    Keywords

    Margin procyclicality; Funding liquidity risk; Systemic risk; Contagion; Networks;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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