The researchers at the BIS focused on the impact when the Central Counterparty Clearinghouses, known as CCPs, increase initial margin requirements for its members during times of stress.

The researchers focused on the impact when the central counterparty clearinghouses, known as CCPs, increase initial margin requirements for its members during times of stress.

This may lead to fire sales in cash and derivative markets as investors dump assets to raise the needed funds, increasing volatility further and triggering additional rounds of margin calls, the paper notes.

Central clearinghouses that hold over $1 trillion in liquid assets may exacerbate periods of financial stress, creating “margin spirals” that can push down asset prices, according to researchers from the Bank for International Settlements.

Clearinghouses require that its members place collateral to protect against counterparty risk, but meeting such demands can create liquidity risks as traders rush to high-quality liquid assets in times of market volatility.

That (CCP) stockpile was equivalent to about 10% of all high-quality liquid assets held by global systemically important banks.

While the size of CCP government bond holdings remains relatively small, the potential for self-reinforcing spirals should not be underestimated,” the BIS said, identifying Brazilian, Chilean and Swedish bonds markets as those with the highest CCP holdings.

The BIS researchers found CCPs are not immune from “flight-to-safety” behavior. The BIS also warned in a separate paper that liquidity needs may force some life insurers to recognize yet unrecognized losses, in a similar fashion to the US banking turmoil in March.