Journal of Financial Market Infrastructures

Risk.net

Auto-collateralization as a liquidity-saving mechanism

Soren Korsgaard

ABSTRACT

This paper examines the effects of introducing an auto-collateralization scheme in a simulated securities settlement system. Using artificially generated data, it shows that auto-collateralization can substantially lower liquidity needs without delaying settlement. By allowing for a more efficient usage of collateral, it also reduces intraday credit exposures. The paper further demonstrates how these efficiency improvements in usage of liquidity depend on the structure of the settlement cycle. The benefits of auto-collateralization are particularly large when system participants' incoming and outgoing payments are negatively correlated over time. Finally, the impact of participant defaults is assessed, and it is shown that auto-collateralization protects against liquidity risk in certain stress scenarios.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here