Bank of England blog: Margin call! Cash shortfall?

Participants in derivative markets collect collateral from their counterparties to help secure claims against them should they default. This practice has become more widespread since the 2007-08 financial crisis, making derivative markets safer. However, it increases potential ‘margin calls’ for counterparties to top up their collateral. If future calls exceed available liquid assets, counterparties would have to borrow. Could money markets meet this extra demand? In a recent paper, we simulate stress-scenario margin calls for many of the largest derivative-market participants and see if they could meet them – including because of payments from upstream counterparties – without borrowing. We compare the sum of any shortfalls with daily cash borrowing in international money markets.

The article is available at https://bankunderground.co.uk/2020/01/23/margin-call-cash-shortfall/

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