The Present Value

ISDA highlights a selection of research papers on derivatives and risk management                   


The Morning After–The Impact on Collateral Supply After a Major Default

IMF Working Paper No.18/228
By Dermot Turing and Manmohan Singh

This paper examines the effect of prudential regulatory standards on surviving clearing members and the supply of high-quality liquid assets (HQLA) in a severely stressed market following a hypothetical default of a major clearing member. The paper suggests that there are at least eight different prudential metrics that are relevant for a clearing member’s cleared business. While some of these metrics would not be affected by the implementation of a central counterparty’s (CCP) default management process, the Basel III liquidity coverage ratio will have the most significant impact on firms (this requires banks to set aside HQLA that can be easily converted into cash to meet liquidity needs for a 30-calendar-day stress scenario). The study shows that market stress following a major default could suddenly increase demand for HQLA in a marketplace where supply is already constrained.

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Market Structure and Transaction Costs of Index CDS

Swiss Finance Institute Research Paper Series No.18-40
By Pierre Collin-Dufresne, Benjamin Junge and Anders B. Trolle

The paper analyzes the market structure and transaction costs of index credit default swaps (CDS) after the implementation of the Dodd-Frank Act. The authors suggest that the CDS market has been operating as a two-tiered market, which consists of dealer-to-client (D2C) trades and interdealer (D2D) trades. D2C and D2C trading takes place on different groups of swap execution facilities. The study uses transaction data from 2013 to 2015, and focuses on CDX.IG and CDX.HY. The study finds that trading volumes are much larger and transaction costs are higher in the D2C segment than in the D2D segment. The authors explain that the difference in transaction costs is due to a higher price impact of D2C trades instead of higher dealer profits. The study suggests that the index CDS market quality is high and that the current market structure is a consequence of the characteristics of client trades, which are relatively infrequent, large in size and differentially informed.

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The Promise of Blockchain Technology for Global Securities and Derivatives Markets: The New Financial Ecosystem and the ‘Holy Grail’ of Systemic Risk Containment

University of Edinburgh School of Law Research Paper Series No. 2018/43
By Emilios Avgouleas and Aggelos Kiayias

The paper examines the potential benefits and some of the risks of the introduction of blockchain technology for securities and derivatives clearing and settlement. The report explains how distributed ledger technology (DLT) systems for derivatives trading, clearing and settlement could be built. DLT systems can increase both risk and position visibility, while retaining market player anonymity, and can create ecosystems that are more capable to handle risk. In addition, investors have increased control over their investments and enhanced post-trade transparency can curb excessive speculation. The report argues that the change in trading, clearing and settlement technology will lead to the creation of uncorrelated clusters of risk through a new generation of DLT operated liquidity and risk pools that will compete with CCPs for the clearing and settlement business.

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