Systemic Risk. Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. This is sometimes referred to as a "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Corporation and/or the other parties that may have impact on the Debentures interact on a daily basis.
Systemic Risk. Systemic risk is the risk that a major failure or disruption in one institution or segment of the market will affect other institutions, leading ultimately to a breakdown of the financial system. The use of derivative transactions and the potential failures within the derivative markets can contribute to this overall systemic risk. Systemic risk, however, is not specific to the derivative markets, and failures and disruptions in other institutions and markets can likewise affect and undermine the derivative market. Systemic failure is generally addressed by regulatory policies which attempt to lessen the risk of a major institutional failure and policies and procedures which attempt to maintain stability and confidence in the overall financial system in the face of a failure in any one institution or market. As part of its counterparty risk guidelines, the Company attempts to diversify its use of counterparties and markets, which also helps to lower systemic risk.
Systemic Risk. Systemic risk is the risk that a major failure or disruption in one institution or segment of the market will affect other institutions, leading ultimately to a breakdown of the financial system. The use of derivative transactions and the potential of failures within the derivatives markets can contribute to this overall systemic risk. Given the continued and increasing oversight of the derivatives markets, this risk is fairly remote.
Systemic Risk. Systemic risk arises in exceptional circumstances and is the risk that the inability of one or more market participants to perform as expected will cause other participants to be unable to meet their obligations when due, thereby affecting the entire capital market.
Systemic Risk. The previous section looked the likelihood an exchange may fail. But, of course, FTX did fail and file for bankruptcy on 2022-11-11. The collapse of FTX was a large event in cryptocurrency. It was the second largest exchange by volume at the time. However, during this period, there were several large institutional failures. Terra/Xxxx, a large stable coin, collapsed on 2022-05-09. The large crypto-focused hedge fund Three Arrows Capital filed for bankruptcy on 2022-06-22. Finally, the bankruptcy of Silicon Valley Bank occurred on 2023-03-10. Although Silicon Valley 26Calculations in Figure 11 use the “Log-Returns” line in Tables 13 and 14 and not the log- approximation. Bank (SVB) was not itself a cryptocurrency institution, its collapse had a large impact on the stable coin USDC since the company backing that coin had significant deposits at SVB. Figure 12 shows spot and derivative volume (across many exchanges) through this period. Each of the four crisis events coincides with an increase in spot and derivative trading volume. In Figure 13 we see the BTC price volatility that co-occurs with these events. The usual asset pricing model would interpret the price changes as changes in the outlook for cryptocurrencies – beliefs are less optimistic or more pessimistic. The crypto carry trade return around these events offers a different insight. Recall, in Section 4, the future’s price is pinned to the spot price. At that (say, now lower) price, the demands of long and short traders are equated through the funding rate. That funding rate could be lower or higher. This is analogous to the slope of the futures curve in traditional dated-futures contracts. When the spot oil price falls, the dated-futures price could fall by more or less. As we saw in Tables 4 and 5, the funding rate and the crypto carry trade return are not directly correlated to a falling spot price. So it is interesting we see in Table 5 (Epoch 5) that through this period of systemic crises that indeed the crypto carry trade return is lower. Figures 14(a) and (b) shows the time series of the funding and basis components of the return (recall equations (3) and (4)). In Section 4 we assumed no basis risk (Ft = Pt) and solved for market-clearing funding rate. In practice, the funding rate is set with a mechanical formula that is a rate of 0.01% per eight-hour period plus an adjustment that depends on the traded perpetual futures price Ft through the basis, Ft−Pt . So both the funding and basis wil...
