Losses from Simulated Defaults in Canada's Large Value Transfer System
The Large Value Transfer System (LVTS) loss-sharing mechanism was designed to ensure that, in the event of a one-participant default, the collateral pledged by direct members of the system would be sufficient to cover the largest possible net debit position of a defaulting participant. However, the situation may not hold if the indirect effects of the defaults are taken into consideration, or if two participants default during the same payment cycle. The authors examine surviving participant total losses under both oneand two-participant default conditions, assuming the potential knock-on effects of the default. Their analysis includes the impact of a decline in value of LVTS collateral following an unexpected default. Simulations of participant defaults indicate that the impact on the LVTS is generally small; surviving participants do incur end-of-day collateral shortfalls, but only rarely and in small amounts. Under the two-participant default scenario, the likelihood of the Bank of Canada having to provide funds to ensure LVTS settlement is reasonably low, as is the average residual-coverage amount. The majority of LVTS participants pledge as collateral securities issued by other system members. However, the impact of an issuer of such collateral defaulting is generally not significant in the LVTS.
|Date of creation:||2010|
|Contact details of provider:|| Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada|
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
When requesting a correction, please mention this item's handle: RePEc:bca:bocadp:10-14. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.