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
Date Written: April 20, 2018
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: Suggested Citation