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1 – 10 of 159In 2022, US financial regulators proposed to mandate a single central clearing mechanism for treasury bonds and repo transactions to stabilize financial markets. The systemic…
Abstract
In 2022, US financial regulators proposed to mandate a single central clearing mechanism for treasury bonds and repo transactions to stabilize financial markets. The systemic risks inherent in repo markets were first highlighted by the global financial crisis and, as a response, global financial authorities such as the Financial Stability Board (FSB) and Bank for International Settlements (BIS) have advocated for the introduction of a central counterparty (CCP). This study examines the structural characteristics of Korean repo markets and proposes the introduction of CCPs as a way to mitigate systemic risk. To this end, the author analyzes the structural differences between US and European repo markets and estimates the potential consequences of introducing CCP clearing in local repo markets. In general, CCPs offer two benefits: they can reduce required capital through netting in multilateral transactions, and they can mitigate the effects of risk transfer by isolating counterparty risk during periods of turbulence. In Korea, the latter effect is expected to play a pivotal role in mitigating potential risks.
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This chapter analyses the operational framework for monetary policy implementation in some central European countries that have recently joined the European Union (EU).1 For the…
Abstract
This chapter analyses the operational framework for monetary policy implementation in some central European countries that have recently joined the European Union (EU).1 For the sake of simplicity, they will be referred to as “non-euro area countries” in the rest of the chapter (although such a classification also includes Denmark, Sweden and the United Kingdom) which are not analysed here. The analysis is based on public information collected for 2001; since then, the operational framework of these central banks has not changed substantially. Most of the recent changes in the operational framework have taken place in the Eurosystem (or euro area, as it is also commonly known). For this reason, more recent euro area data is reported for 2003 and 2004, and a detailed analysis is made wherever appropriate. The study therefore presents an uptodate comparison of operational frameworks across the countries. The remainder of the chapter is organised as follows. Section 2 examines the characteristics of the minimum reserve system in the euro area. Section 3 examines open market operations, Section 4 examines the standing facilities and Section 5 looks at counterparties. Finally, chapter 6 describes at eligible collateral.
I estimate that a margin as trading frictions has an effect on the strategies of writing options. The important results are as follows.First, by the margin requirement is…
Abstract
I estimate that a margin as trading frictions has an effect on the strategies of writing options. The important results are as follows.
First, by the margin requirement is increased, the size of short position is reduced. Second, the discrimination of a margin requirement is due to the way that the member margin is imposed less about 1/3 than the customer margin by derivatives market business regulation in KRX. Third, the customer margin is from 1.4 to 1.6 times more than the member margin, and the margin “haircut” ratio is similar to that of the margin. Fourth, by target weight increases, the difference between target weight and effective weight is increased. Fifth, by target weight is increased, the member have higher returns on writing combination position than the customer have. It means that when investors increase the size of short position using all of account, they not only can suffer loss because of margin call but also can make profit.
Overall, the difference between the returns of the member and the returns of the customer can be quite substantial. So, this paper contributes to the literature that studies the impact of the different imposition of margins by showing how frictions limit the customer from supplying liquidity to the market and hence releasing pressure on the member.
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There is limited discussion in the literature of the problems associated with constructing stress tests. The Credit Crunch has revealed that attention simply to haircuts to asset…
Abstract
Purpose
There is limited discussion in the literature of the problems associated with constructing stress tests. The Credit Crunch has revealed that attention simply to haircuts to asset values and resulting margin calls is insufficient. The purpose of this paper is to explore additional avenues for stress testing.
Design/methodology/approach
The paper is largely discursive.
Findings
Stress tests must look into the debt position of the firm, as well as its position and credit exposures. Not only the volume of debt but its maturity structure, callability and the indentures attached to it are extremely important.
Research limitations/implications
The paper is geared more toward management and practitioners than to academic researchers. Implications for the analysis of corporate strategy are significant.
Social implications
Stress testing is essential to the confident continuance of firms.
Originality/value
So much of the work in this area is proprietary and so little has been published on it.
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This paper aims to discuss the European Commission’s proposal for a central counterparty (CCP) recovery and resolution regulation. In this respect, the paper comments the…
Abstract
Purpose
This paper aims to discuss the European Commission’s proposal for a central counterparty (CCP) recovery and resolution regulation. In this respect, the paper comments the consequences, risks and attention points for CCPs and their authorities.
Design/methodology/approach
This paper focuses on the proposed rules surrounding CCP recovery and resolution. The paper first familiarizes the reader with the risk management procedures currently obliged before discussing the resolution and recovery provisions foreseen in the proposal.
Findings
The proposed regulation commands significant requirements for CCPs and for their regulators. Not only will CCPs have to draft a recovery plan but also a resolution authority will need to be assigned. The latter will have the task, in consultation with a resolution college, to draft a resolution plan. When a resolution is inevitable, authorities will need to assure the continuation of the CCP’s critical functions, thereby warranting financial stability and investor protection.
Originality/value
To the best of the author’s knowledge, there are no other papers that provide a holistic overview of the newly proposed regulation and describe the choices to be made during a CCP’s resolution. This paper will be of interest to all CCPs and their stakeholders, such as their regulators, clearing members and their clients and other linked financial market infrastructures.
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Robert A. Eisenbeis and Richard J. Herring
The purpose of this paper is to examine the events leading up to the Great Recession, the US Federal Reserve’s response to what it perceived to be a short-term liquidity problem…
Abstract
Purpose
The purpose of this paper is to examine the events leading up to the Great Recession, the US Federal Reserve’s response to what it perceived to be a short-term liquidity problem, and the programs it put in place to address liquidity needs from 2007 through the third quarter of 2008.
Design/methodology/approach
These programs were designed to channel liquidity to some of the largest institutions, most of which were primary dealers. We describe these programs, examine available evidence regarding their effectiveness and detail which institutions received the largest amounts under each program.
Findings
We argue that increasing financial fragility and potential insolvencies in several major institutions were evident prior to the crisis. While it is inherently difficult to disentangle issues of illiquidity from issues of insolvency, failure to recognize and address those insolvency problems delayed necessary adjustments, undermined confidence in the financial system and may have exacerbated the crisis.
Research limitations/implications
Disentangling issues of illiquidity from issues of insolvency is inherently difficult and so it is not possible to specify a definitive counterfactual scenario. Nonetheless, failure to recognize and address the insolvency problems in several major institutions until more than a year after the crisis had begun delayed the necessary adjustment and undermined confidence in the financial system.
Originality/value
This paper is among the first to analyze data showing the amounts of lending and the distribution of these loans across institutions under the Fed’s special liquidity facilities during the first 18 months of the financial crisis.
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The financial crisis 2007‐2009 calls for a regulatory response. A crucial element of this task is the treatment of systemic risk. Basel III gains centre stage in this process…
Abstract
Purpose
The financial crisis 2007‐2009 calls for a regulatory response. A crucial element of this task is the treatment of systemic risk. Basel III gains centre stage in this process. Thus, the purpose of this paper is to evaluate Basel III, examining its ability to reduce systemic risk.
Design/methodology/approach
The paper highlights the importance of reducing systemic risk to achieve the goal of overall financial stability. By first focusing on the theoretical foundations of systemic risk, this paper explores and analyzes the crucial aspects of this almost impalpable risk type. It further investigates the current regulation of systemic risk, clearly showing Basel II's inability to reduce it. Then, it evaluates the Basel Committee's efforts to address these weaknesses through Basel III by investigating its incentives and its ability to reduce obvious drawbacks of Basel II as well as systemic risk factors.
Findings
The findings show that there are still adjustments necessary. Although the development of Basel III is well advanced, providing some stabilizing incentives, there are still issues calling for closer consideration to counter all Basel II drawbacks and systemic risk factors adequately. These include: a risk‐weighted leverage ratio; a more thorough treatment of procyclicality; adjustments for the NSFR (Net Stable Funding ratio); and most importantly, the mandatory issue to internalize negative externalities from financial institutions, that is, the call for pricing systemic risk.
Originality/value
The paper not only examines the new Basel III framework, as a response to the Financial Crisis 2007‐2009, but also draws attention to specific areas which the Basel Committee and regulators need to focus on more thoroughly.
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Central clearing counterparties’ (CCPs) specific loss allocation mechanism is reflected in the specific resolution regime designed at the international level. At the same time…
Abstract
Purpose
Central clearing counterparties’ (CCPs) specific loss allocation mechanism is reflected in the specific resolution regime designed at the international level. At the same time, international guidance texts require equity to bear losses first in resolution. This creates a tension that immediately exposes resolution authorities to potential claims from CCPs’ shareholders. The purpose of this paper is to seek possible options to solve that tension, thereby enabling a workable and credible resolution regime for CCPs.
Design/methodology/approach
The paper analyses the current tension between the no creditor worse-off (NCWO) counterfactual for CCPs and the “equity bears first losses in resolution” principle. It then considers six different options to solve this tension, ranging from a revision of insolvency law to the modification of the loss-allocation structure.
Findings
The paper concludes that additional layers of capital contribution, adapting the contractual arrangements or articles of incorporation and/or the creation of a specific NCWO counterfactual for shareholders could help in solving the identified tension.
Practical implications
The paper presents options on how to design a workable and credible resolution regime for CCPs that would enable resolution authorities to exercise their powers and have the flexibility to intervene at an early stage in recovery to prevent the exhaustion of available financial resources, without being unduly exposed to claims.
Originality/value
The paper contributes to the literature on CCP resolution. It is one of the first to analyse the articulation between the loss-allocation structure of CCPs, the NCWO principle and shareholders’ rights. We hope that this paper will encourage further literature to develop on this important subject.
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The purpose is of this paper is to investigate whether the tracking ability of exchange traded funds (ETFs) is lower in highly volatile periods, and to shed more light on the…
Abstract
Purpose
The purpose is of this paper is to investigate whether the tracking ability of exchange traded funds (ETFs) is lower in highly volatile periods, and to shed more light on the factors behind the tracking error.
Design/methodology/approach
The authors apply the Error Correction Model that incorporates a short‐run adjustment mechanism on domestic US ETFs that follow industrial indices.
Findings
It was found that tracking errors attained pronounced levels during 2008 compared to 2006 and 2007, mainly in ETFs from the real estate and banking and finance sectors. In addition, tracking error is positively correlated with the daily volatility of the ETF, while trading volume has a limited effect on reducing tracking errors.
Practical implications
The paper sheds more light on the relationship between securities and their fundamentals, and contributes to the literature on the information transmission mechanism for dually‐listed securities.
Originality/value
The paper uses the co‐integration tests and the error correction model (ECM) to test the long‐run relationship between returns on domestic exchange trade funds (ETFs) and the returns on the underlying indices. In particular, the ECM is used for ETFs for the first time.
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