Tag Archives: Market liquidity

Trimming the Hedge: How can CCPs efficiently manage a default?

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.

Continue reading

1 Comment

Filed under Financial Markets, Financial Stability, Market Infrastructure

Bitesize: Blink and you’ve missed it: French government bond ‘mini flash’

Gosia Goralczyk

On 16 February 2017, following the release of the ECB’s January meeting accounts, French government bond (OAT) futures experienced a so-called ‘mini flash’, with yields falling 11bps within 85 seconds, in a period of significant illiquidity, before retracing most  of the move within eight minutes.

Continue reading

Comments Off on Bitesize: Blink and you’ve missed it: French government bond ‘mini flash’

Filed under Financial Markets, Financial Stability

Has corporate bond market liquidity fallen?

Yuliya Baranova, Louisa Chen and Nicholas Vause.

Many investors report recent declines in market liquidity, suggesting dealers have become less willing to trade corporate bonds and other fixed-income securities due to additional costs of holding them on their balance sheets. Some fear that if asset managers began to sell these securities then prices could fall sharply. Focusing on high-yield corporate bonds, we use an econometric model to investigate whether the typical responses of dealer inventories and market prices to falls in asset manager demand have changed in recent years. We find that dealer holdings act less as a shock absorber than they did around a decade ago. Instead, bond spreads rise more. We also find that greater declines in issuance now follow these shocks.

Continue reading

Comments Off on Has corporate bond market liquidity fallen?

Filed under Financial Markets, Financial Stability