Procyclicality and Risk-Based Access: Valuing the Embedded Credit Default Swap of Employing Bilateral Credit Limits in Financial Market Infrastructures

Payments Canada has released a new discussion paper, Procyclicality and Risk-Based Access: Valuing the Embedded Credit Default Swap of Employing Bilateral Credit Limits in Financial Market Infrastructures, authored by senior researcher Segun Bewaji, which models the Canadian Large-Value Transfer System (LVTS) risk model as a credit default swap contract. Based on empirical evidence spanning 2005-2016, the paper suggests that loss-sharing arrangements underpinning the LVTS risk model are perhaps most valuable to system participants under periods of significant financial and economic stress, when market liquidity is at a premium.

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