Episodes of vanishing market liquidity haunt dealers. This was true in the great stock market crash of 1929 and remains so today: in August 2018, professional corporate bond traders cited vanishing liquidity as their primary source of worry. Dealers in more-liquid long gilt futures – contracts on 10 year UK government bonds – might be less concerned. But have structural changes in the market led to less resilience over time? We address this question in a recent Staff Working Paper. We find that liquidity in the long gilt futures market has increased slightly over recent years, while remaining resilient to periods of market stress.
Post-crisis regulatory reforms have reshaped and increased the amount of clearing activity in the OTC derivatives market. An emerging issue is so-called “client porting” – i.e. how central counterparties (CCPs) can transfer positions from one clearing member (CM) to another in the aftermath of one member defaulting. In this post, we discuss possible ways to offer clients temporary access to clearing services following a CM default, which we believe could increase the likelihood of successfully porting clients and avoiding further pressure on prices and market stability.
Blockchain is often discussed as if it is one single technology. But it is really a combination of several distinct features – decentralisation, distribution, cryptography, and automation – which are combined in different ways by different platforms. Some of these features may have benefits, while others may be unnecessary or even unhelpful – depending on the specific application. In this post, I consider whether and how these features may have different potential applications in financial services. Blockchain will only be truly useful in settings where one of more of these features solves a problem that existing technologies cannot.
Cryptoassets (or ‘cryptocurrencies’) are notoriously volatile. For example, in November 2018, Bitcoin – one of the more stable cryptoassets – lost 43% of its value in just 11 days. This kind of volatility makes it difficult for cryptoassets to function as money: they’re too unstable to be a good store of value, means of exchange or unit of account. But could so-called ‘stablecoins’ solve this problem and finally provide a price-stable cryptoasset?
Will people in 2030 buy goods, get mortgages or hold their pension pots in bitcoin, ethereum or ripple rather than central bank issued currencies? I doubt it. Existing private cryptocurrencies do not seriously threaten traditional monies because they are afflicted by multiple internal contradictions. They are hard to scale, are expensive to store, cumbersome to maintain, tricky for holders to liquidate, almost worthless in theory, and boxed in by their anonymity. And if newer cryptocurrencies ever emerge to solve these problems, that’s additional downside news for the value of existing ones.
Every day UK banks and corporates (“participants”) make sizeable payments to each other through CHAPS, the country’s high-value payment system. However, these payments are liquidity-intensive: every payment must be pre-funded, i.e. the payer must have in place the full amount to be paid. This can be costly, so each participant would prefer to first receive some money from another one and then make its own payments by recycling the received amount. However, this still requires that some participants supply intra-day liquidity to the system by making the first payments. But who are these participants? This post shows that it is typically the smaller ones and also those perceived by markets to be riskier that get the ball rolling…
Fernando Cerezetti, Emmanouil Karimalis, Ujwal Shreyas and Anannit Sumawong
When a trade is executed and cleared though a central counterparty (CCP), the CCP legally becomes a buyer for every seller and a seller for every buyer. When a CCP member defaults, the need to establish a matched book for cleared positions means the defaulter’s portfolio needs to be closed out. The CCP then faces a central question: what hedges should be executed before the portfolio is liquidated so as to minimize the costs of closeout? In a recent paper, we investigate how distinct hedging strategies may expose a CCP to different sets of risks and costs during the closeout period. Our analysis suggests that CCPs should carefully take into account these strategies when designing their default management processes.