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Liquid assets at CCPs and systemic liquidity risks

Author

Listed:
  • Iñaki Aldasoro
  • Fernando Avalos
  • Wenqian Huang

Abstract

Central counterparties (CCPs) are key players in financial markets, holding $1.3 trillion in liquid assets as of June 2023. The holdings are highly concentrated in the eight largest CCPs, mainly based in Europe and the United States. Most of these liquid assets are "cash" – ie deposits at central banks, reverse repos and unsecured bank deposits – and government bonds, which CCPs receive as collateral for the transactions they clear. This collateral improves systemic resilience by shielding CCPs from counterparty risk. But it also imposes liquidity demands on market participants that, occasionally, could worsen financial stress during flight-to-safety episodes or lead to destabilising margin spirals. The dual role of government bonds as both collateral and underlying assets for CCP-cleared derivatives introduces "wrong-way" risk that can exacerbate these spirals.

Suggested Citation

  • Iñaki Aldasoro & Fernando Avalos & Wenqian Huang, 2023. "Liquid assets at CCPs and systemic liquidity risks," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:2312c
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    References listed on IDEAS

    as
    1. Andreas Schrimpf & Hyun Song Shin & Vladyslav Sushko, 2020. "Leverage and margin spirals in fixed income markets during the Covid-19 crisis," BIS Bulletins 2, Bank for International Settlements.
    2. Umar Faruqui & Wenqian Huang & Előd Takáts, 2018. "Clearing risks in OTC derivatives markets: the CCP-bank nexus," BIS Quarterly Review, Bank for International Settlements, December.
    3. David Murphy & Michalis Vasios & Nick Vause, 2014. "Financial Stability Paper No 29: An investigation into the procyclicality of risk-based initial margin models," Bank of England Financial Stability Papers 29, Bank of England.
    4. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    5. Aramonte, Sirio & Schrimpf, Andreas & Shin, Hyun Song, 2023. "Margins, debt capacity, and systemic risk," CEPR Discussion Papers 18570, Centre for Economic Policy Research.
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    Cited by:

    1. John Heilbron & Nick Schwartz, 2026. "Central Counterparty Management of Liquid and Prefunded Resources," Working Papers 26-04, Office of Financial Research, US Department of the Treasury.
    2. John Heilbron & Stathis Tompaidis, 2025. "The Impact of CCP Liquidity and Capital Demands on Clearing Members Under Stress," Working Papers 25-03, Office of Financial Research, US Department of the Treasury.

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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