Procyclicality and risk-based access: valuing the embedded credit default swap of employing bilateral credit limits in financial market infrastructures

Published: March 14, 2019

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.