An Unintended Consequence of Holding Dollar Assets

The Impact of Derivatives Collateralisation on Liquidity Risk: Evidence from the Investment Fund Sector

“…Bardoscia et al (2021)). In addition, Fache Rousová et al (2020a), Ghio et al (2022) and Czech et al (2021) suggest that the need of non-banks to meet variation margin can pass stress on to other markets. Finally, it was the large variation margin call that led AIG close to failure in 2008 (McDonald and Paulson, 2015).…”

Derivative Margin Calls: A New Driver of MMF Flows

“…The exchange of margin in the form of high-quality collateral reduces counterparty credit risk, but the requirements also increase liquidity risk as counterparties need to meet margin calls with high-quality collateral at short notice (ECB, 2016(ECB, , 2020a. In this respect, our paper is the closest to Czech et al (2021), which shows that UK-based insurance companies and pension funds heavily sold gilts to meet VM calls on their FX hedges. But Czech et al (2021) does not look at MMFs.…”

“…In this respect, our paper is the closest to Czech et al (2021), which shows that UK-based insurance companies and pension funds heavily sold gilts to meet VM calls on their FX hedges. But Czech et al (2021) does not look at MMFs. A similar recent spiral involving UK LDI funds responding to margin calls on their IR hedges has been documented in Bank of England (2022).…”

Can Time-Varying Currency Risk Hedging Explain Exchange Rates?

“…The causal logic follows what Liao and Zhang (2021) have termed the "hedging channel" of exchange rate determination: Asymmetric hedging demands between domestic and foreign investors in the forward rate market alter the forward rate and spill into spot rate changes because of arbitrage between the forward and spot markets. Czech et al (2021) also examine this hedging channel in a recent study. They emphasize the negative consequences on domestic bond markets generated by the hedging channel due to margin call requirements for British insurance companies and pension funds during the recent COVID crisis.…”