Central clearing and collateral demand

Abstract

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Limited Investment Capital and Credit Spreads

“…Because of postcrisis collateralization rules, measures the net amount of variation margin payments made by c to its counterparties over the course of the week . These margin payments are fully collateralized, paid daily, and draw on the desk's liquid capital buffer (e.g., Duffie, Scheicher, and Vuillemey ()). Thus, is a natural measure of capital shocks at the CDS desk of each counterparty.…”

“…In particular, I examine how the CDS spread of a firm responds when that firm's default insurance sellers or buyers suffer capital losses. I compute seller (or buyer) capital shocks based on changes in the value of their CDS portfolio, which for institutional reasons also correspond to CDS portfolio margin payments (Duffie, Scheicher, and Vuillemey ()). Importantly, my capital shock variables derive from positions taken on unrelated firms.…”

Funding Value Adjustments

“…For the case of CDS, the degree to which initial dealer margin to central counterparties and other dealers is reduced by netting is examined empirically by Duffie, Scheicher, and Vuillemey (2015).…”

Contagion in Derivatives Markets

“…Capponi and Cheng (2018) examine the tension between setting member fees and collateral levels and how, if made effectively, these choices limit contagion from portfolio shocks. Various empirical studies examine how CCPs set margin levels in practice (Duffie et al (2015); Capponi et al (2017)). These studies find that value-at-risk approaches tend to underestimate CCP collateral levels.…”