Interest Rate Swaps Clearing and Systemic Risk

Bakoush, M., Gerding, E.H. and Wolfe, S., 2019. Interest rate swaps clearing and systemic risk. Finance Research Letters.

13 Pages Posted: 29 Jan 2020

See all articles by Mohamed Bakoush

Mohamed Bakoush

University of Southampton - Southampton Business School

Enrico Gerding

University of Southampton - School of Electronics and Computer Science (ECS)

Simon Wolfe

University of Southampton - School of Management; University of Southampton - Southampton Business School

Date Written: April 20, 2018

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.

Keywords: Margin procyclicality; Funding liquidity risk; Systemic risk; Contagion; Networks

JEL Classification: G15, G21, G28

Suggested Citation

Bakoush, Mohamed and Gerding, Enrico and Wolfe, Simon, Interest Rate Swaps Clearing and Systemic Risk (April 20, 2018). Bakoush, M., Gerding, E.H. and Wolfe, S., 2019. Interest rate swaps clearing and systemic risk. Finance Research Letters. . Available at SSRN: https://ssrn.com/abstract=3516048 or http://dx.doi.org/10.2139/ssrn.3516048

Mohamed Bakoush (Contact Author)

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

Enrico Gerding

University of Southampton - School of Electronics and Computer Science (ECS) ( email )

University Road
Southampton
United Kingdom

Simon Wolfe

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

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