Margin Calls From Clearinghouses Seen Stoking Future Crises
- Use of central clearing was seen a fix after 2008 crisis
- BIS researchers see a liquidity risk from ‘margin spirals’
The Bank for International Settlements in Basel.
Photographer: Gianluca Colla/Bloomberg
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Central clearinghouses that hold over $1 trillion in liquid assets may exacerbate periods of financial stress, creating “margin spirals” that can push down asset prices, according to researchers from the Bank for International Settlements.
The researchers focused on the impact when the central counterparty clearinghouses, known as CCPs, increase initial margin requirements for its members during times of stress. This may lead to “fire sales” in cash and derivative markets as investors dump assets to raise the needed funds, increasing volatility further and triggering additional rounds of margin calls, the paper notes.