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Newsletter
Managing Risk in Global Financial Markets: CCP Governance, Supervisory Stress Testing, and Default Management Auctions
The second annual Symposium on OTC Derivatives was held in Shanghai on June 26, 2018. This event was cosponsored by the People?s Bank of China and the Federal Reserve Bank of Chicago and hosted by CCP12 (The Global Association of Central Counterparties). Its three panels focused on central counterparty (CCP) governance, supervisory stress testing, and default management auctions.
Journal Article
OTC Derivatives—A Primer on Market Infrastructure and Regulatory Policy
In this article, we discuss some recent developments relating to the regulation of derivatives markets, specifically the Group of Twenty (G-20) mandates, and examine the infrastructure that supports derivatives markets (including both the trade execution and post-trade clearing and settlement processes). Then we identify some of the policy issues raised by the G-20 market structure mandates. To provide a foundation for that discussion, first we explain some key concepts and terms.
Journal Article
Inefficiency in a Simple Model of Production and Bilateral Trade
We study a simple model of over-the-counter trade with production. We characterize the equilibrium, and we show that the equilibrium is always inefficient, independent of how the trade surplus is split among trade participants. We argue that this is due to a double hold-up problem that it is at the core of models used to study trade in over-the-counter markets. Finally, we show an example, which we interpret as a limiting case of the general model where the inefficiency vanishes.
Report
Trade dynamics in the market for federal funds
We use minute-by-minute daily transaction-level payments data to document the cross-sectional and time-series behavior of the estimated prices and quantities negotiated by commercial banks in the interbank market. We study the frequency and volume of trade, the size distribution of loans, the distribution of bilateral rates, and the intraday dynamics of the reserve balances held by commercial banks. We find evidence of the importance of the liquidity provision achieved by commercial banks that act as de facto intermediaries of funds.
Report
The over-the-counter theory of the fed funds market: a primer
We present a dynamic over-the-counter model of the fed funds market, and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the Discount Window lending rate, and the interest rate on bank reserves.
Journal Article
Cleared Margin Setting at Selected Central Counterparties
Interviews with senior personnel at six of the world?s largest central counterparty clearing houses and research by financial markets staff shed light on regulations, principles, and best practices in margin setting for derivatives.
Newsletter
Symposium on OTC Derivatives—A Conference Summary
The People?s Bank of China (PBOC) and the Federal Reserve Bank of Chicago sponsored the Symposium on OTC Derivatives in Shanghai on May 23, 2017, in conjunction with CCP12, a global association of major central counterparties (CCPs). The conference focused on current risk management and regulatory issues facing CCPs.
Working Paper
Cash-in-the-Market Pricing in a Model with Money and Over-the-Counter Financial Markets
Entrepreneurs need cash to finance their real investments. Since cash is costly to hold, entrepreneurs will underinvest. If entrepreneurs can access financial markets prior to learning about an investment opportunity, they can sell some of their less liquid assets for cash and, as a result, invest at a higher level. When financial markets are over-the-counter, the price that the entrepreneur receives for the assets that he sells depends on the amount of liquidity (cash) that is in the OTC market: Greater levels of liquidity lead to higher asset prices. Since asset prices are linked to ...
Journal Article
Derivatives and Collateral at U.S. Life Insurers
Although insurers represent a relatively small part of the derivatives markets, they are an interesting case study, in part because they report very detailed information about their derivatives positions and associated collateral in quarterly regulatory filings. The authors exploit these data to study how derivatives are used by insurers and analyze the likely impact of regulatory reforms on their business models.