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Discussion of “An Integrated Framework for Multiple Financial Regulations”
A 2012 paper by Goodhart, Kashyap, Tsomocos, and Vardoulakis (GKTV) proposes a dynamic general equilibrium framework that provides a conceptual?and to some extent quantitative?framework for the analysis of macroprudential policies. The distinguishing feature of GKTV?s paper relative to any other on macroprudential policy is its study of a setting with multiple financial frictions that permits the analysis of multiple macroprudential policy tools at the same time. The modeling approach includes various market failures such as incomplete markets with heterogeneous agents, fire-sale ...
Central Clearing and Systemic Liquidity Risk
By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or ...
An Empirical Analysis of Futures Margin Changes: Determinants and Policy Implications
Margin regulation raises two policy concerns. First, an alignment of margins to volatility can amplify procyclicality, leading to a build-up of excess leverage in good times and a forced deleverage in bad times. Second, competition among central counterparties (CCPs) can result in lower margin levels in order to attract more trading volume, which is referred to as a "race to the bottom." Motivated by these issues, we empirically analyze the determinants of margin changes by using a data set of various futures margins from Chicago Mercantile Exchange (CME) Group. We first find that CME ...