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Liquidity Challenges and How to Navigate Them

Ovie Koloko
By Ovie Koloko, Chief Product Officer Apr 9, 2024
Liquidity Challenges and How to Navigate Them


Managing Liquidity

Liquidity is a persistent challenge for OTC derivative market participants. Effective risk management practices driven by in-depth data is paramount if businesses are to navigate the unpredictable waters ahead.

The global financial crisis forced OTC market players to think more seriously about the very real risk of institutional failure.

Regulators on both sides of the Atlantic stepped in with rules designed to improve transparency and reduce systemic risk. But while the Dodd-Frank Act in the United States and the European Market Infrastructure Regulation (EMIR) in Europe may have achieved these aims, largely by driving much of the trading activity on centralised clearing platforms, participants now must manage the unintended consequence of reduced liquidity.

As Dave Ramsden, Deputy Governor of Markets and Banking at the Bank of England, notes, while the ubiquitous use of collateral has financial stability benefits, including by facilitating hedging of firm-level interest rate risk and significant reduction in counterparty credit risk, “it has led both to an increase in system-wide liquidity needs and an increased importance for effective risk management of idiosyncratic liquidity risks at individual firms”.1

Add to this the shorter intraday settlement cycles against which financial institutions must monitor, manage and reserve in persistently volatile markets, funding and liquidity challenges are unlikely to abate anytime soon.

OTC derivatives players have no choice but to navigate illiquid markets, which means ensuring they have access to the right data, market analytics and risk management systems. Only those organisations that develop and implement robust liquidity risk management policies – encompassing liquidity stress testing, liquidity measurement and risk limits – have the best chance in surviving the most stressful conditions.

Hard-working data

OTC derivative market participants need full sight of the markets in which they operate. This means not only accessing real-time data but having an ability to analyse historical information.

Exploring past events that had an impact on liquidity within derivatives markets – such as the 2008 financial crisis, the 2020 COVID-19 pandemic or the 2022 gilt crisis – can help inform risk management processes today.

Parameta Solutions, the data and analytics division of TP ICAP Group which is the world’s largest inter-broker dealer, has unrivalled indicative and transactional data which comes with full history for all the markets we cover. Our depth of coverage supports clients with generating alpha, price discovery, risk management and valuation tasks so they can meet regulatory and compliance requirements.

Reliable stress-testing

Employing effective stress-testing techniques that evaluate the resilience of financial institutions and derivatives markets under adverse conditions focusing on liquidity scenarios are critical.

Exploring how different derivatives react to changes in market conditions, such as heightened volatility or shifts in interest rates or assessing the resilience of derivatives to liquidity shocks and their ability to maintain market functioning, make a genuine difference to how players understand the impact of market liquidity. Stress testing is essential to ensuring organisations have contingency plans in place and are well protected during difficult markets.

Our in-depth, consistent and robust market data informs reliable stress testing. We have more than 20 years of historical price data which can be incorporated into research processes helping to identify patterns, validate hypotheses and make more informed decisions.

Advanced technology

The role of leading technologies including artificial intelligence, machine learning and automation is already becoming clear in the OTC derivatives space. These advances make analysing data which identifies shifts in market structures and the necessary responses from OTC derivatives participants more reliable, faster and ultimately help to minimise disruption.

Technology is at the core of Parameta Solutions’ operation; we always have one eye on the future and constantly assess the key trends and shifting dynamics of an ever-changing marketplace. This agility helps us to deliver the best possible results for our clients and, in turn, ensures that they can future-proof their own businesses. Adapting to the ever-evolving landscape of liquidity risk in derivatives trading means robust risk management practices informed by consistent, reliable data. Parameta offers a range of innovative solutions to keep your business ahead of the curve.


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