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Derivatives-related liquidity risk facing investment funds

Author

Listed:
  • Gravanis, Marios
  • Jukonis, Audrius
  • Letizia, Elisa
  • Rousová, Linda

Abstract

Stricter margining requirements for derivative positions have increased the demand for collateral by market participants in recent years. At the same time, euro area investment funds which use derivatives extensively have been reducing their liquid asset holdings. Using transaction-by-transaction derivatives data, this special feature assesses whether the current levels of funds’ holdings of cash and other highly liquid assets would be adequate to meet funds’ liquidity needs to cover variation margin calls on derivatives during stressed market periods, once the derivative portfolios become fully collateralised. The evidence so far indicates that euro area funds were able to meet the fivefold increase in variation margin during the height of the coronavirus-related market stress. But some of them were likely to have done so by engaging in repo transactions, selling assets and drawing on credit lines, thus amplifying the recent market dynamics.

Suggested Citation

  • Gravanis, Marios & Jukonis, Audrius & Letizia, Elisa & Rousová, Linda, 2020. "Derivatives-related liquidity risk facing investment funds," Financial Stability Review, European Central Bank, vol. 1.
  • Handle: RePEc:ecb:fsrart:2020:0001:2
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    File URL: https://www.ecb.europa.eu//pub/financial-stability/fsr/special/html/ecb.fsrart202005_02~d48451c1cb.en.html
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    Cited by:

    1. Molestina Vivar, Luis & Wedow, Michael & Weistroffer, Christian, 2023. "Burned by leverage? Flows and fragility in bond mutual funds," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 354-380.
    2. Jukonis, Audrius & Letizia, Elisa & Rousová, Linda, 2022. "The impact of derivatives collateralisation on liquidity risk: evidence from the investment fund sector," Working Paper Series 2756, European Central Bank.
    3. Maddalena Ghio & Linda Rousova & Dilyara Salakhova & Mr. German Villegas Bauer, 2023. "Derivative Margin Calls: A New Driver of MMF Flows," IMF Working Papers 2023/061, International Monetary Fund.
    4. Stijn Claessens & Ulf Lewrick, 2022. "Open-ended bond funds: Systemic risks and policy implications," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 72(01), pages 45-62, December.

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