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Valentina Macchiati
- 14 July 2025
- WORKING PAPER SERIES - No. 3074Details
- Abstract
- We propose a novel framework to assess systemic risk stemming from the inadequate liquidity preparedness of non-bank financial institutions (NBFIs) to derivative margin calls. Unlike banks, NBFIs may struggle to source liquidity and meet margin calls during periods of significant asset price fluctuations, potentially triggering asset fire sales and amplifying market volatility. We develop a set of indicators and statistical methods to assess liquidity preparedness and examine risk transmission through common asset holdings and counterparty exposures. Applying our framework to euro area NBFIs during the Covid-19 turmoil and the 2022–2023 monetary tightening, we observe an increase in distressed entities, which, in turn, seem to exhibit more liquidity-driven selling behaviours than their non-distressed peers. Network analysis suggests that certain counterparties of distressed entities appear particularly vulnerable to margin call-induced liquidity shocks. Our framework offers policymakers valuable tools to enhance the monitoring and resilience of the NBFI sector.
- JEL Code
- C02 : Mathematical and Quantitative Methods→General→Mathematical Methods
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G01 : Financial Economics→General→Financial Crises
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 16 May 2024
- FINANCIAL STABILITY REVIEW - BOXAssessing the liquidity preparedness of investment funds to meet margin calls in derivatives marketsFinancial Stability Review Issue 1, 2024Details
- Abstract
- Recent episodes of liquidity stress highlight the need to monitor funds’ liquidity preparedness to meet margin calls on derivatives. This box proposes four indicators of fund-level liquidity preparedness to meet margin calls to identify potential vulnerabilities that may require higher cash buffers and/or more diversified high-quality liquid assets (HQLA). Both the stock of initial margin posted and the flow of initial and variation margin are examined, offering complementary insights. The first set of indicators considers the ratios between the volumes of margin stock or flow over cash holdings, while the second set replaces cash with HQLA. The results highlight how cash alone may not be enough to cover margin calls, thus emphasising the importance of funds relying on diverse and reliable sources of liquidity and collateral. Moreover, existing vulnerabilities in the fund sector can lead to procyclical behaviours, amplifying market-wide stress and spreading to other market participants.
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G10 : Financial Economics→General Financial Markets→General
G15 : Financial Economics→General Financial Markets→International Financial Markets
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors