Liquidity, innit? December 1, 2013 at 2:46 pm

The ongoing debate about CCP collateral is interesting. The claim at its simplest is that even very good quality bonds – US T-bills for instance – are not perfect collateral because they cannot be turned into cash immediately. As Reuters reports:

Lawrence Sweet, senior vice president at the New York Fed, said last week that Treasuries could still pose risks to clearinghouse liquidity because payment for sales of Treasuries is not settled until the next day.

The idea, I think, is that if margin is 100% USTs, and a default happens, the CCP could absent other mechanisms (like lines of credit) find itself solvent but not liquid for a day. Market maker of last resort function anyone?

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