Collateralized Networks

48 Pages Posted: 1 May 2020

See all articles by Samim Ghamami

Samim Ghamami

Securities and Exchange Commission (SEC); New York University (NYU); University of California, Berkeley - Center for Risk Management Research

Paul Glasserman

Columbia Business School

Peyton Young

Government of the United States of America - Office of Financial Research; Brookings Institution; University of Oxford

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Date Written: April 6, 2020


This paper studies the spread of losses and defaults in financial networks with two interrelated features: collateral requirements and alternative contract termination rules, which control access to collateral. When collateral is committed to a firm's counter-parties, a solvent firm may default if it lacks sufficient liquid assets to meet its payment obligations. Collateral requirements can thus increase defaults and payment shortfalls. Moreover, one firm may benefit from the failure of another if the failure frees collateral committed by the surviving firm, giving it additional resources to make other payments. Contract termination at default may also improve the ability of other firms to meet their obligations through access to collateral. As a consequence of these features, the timing of payments and collateral liquidation must be carefully specified to establish the existence of payments that clear the network. Using this framework, we contrast pooled and dedicated collateral; we study the consequences of illiquid collateral for the spread of losses through fire sales; we compare networks with and without selective contract termination; and we analyze the impact of alternative bankruptcy stay rules that limit the seizure of collateral at default. Under an upper bound on derivatives leverage, full termination reduces payment shortfalls compared with selective termination.

Keywords: Contagion, OTC Markets, Financial Regulation, Network, Fire Sales, Collateral, Automatic Stays for Qualified Financial Contracts

JEL Classification: D53, D70, E44, G1, G28, G33, K22

Suggested Citation

Ghamami, Samim and Glasserman, Paul and Young, Peyton, Collateralized Networks (April 6, 2020). Available at SSRN: or

Samim Ghamami (Contact Author)

Securities and Exchange Commission (SEC) ( email )

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Washington, DC 20549-1105
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New York University (NYU) ( email )

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University of California, Berkeley - Center for Risk Management Research ( email )

581 Evans Hall
Berkely, CA 94720
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Paul Glasserman

Columbia Business School ( email )

New York, NY
United States

Peyton Young

Government of the United States of America - Office of Financial Research ( email )

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Washington DC, DC 20005
United States

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

University of Oxford

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United Kingdom

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