The Global Risks Alliance (GRA)
Market liquidity is the ability to trade a meaningful amount quickly without moving the price much; funding liquidity is the ability to finance a position or meet a margin call. The two reinforce each other, and when both fail together, markets that are deep in normal times can dislocate within hours. This page sets out how liquidity stress develops and spreads, how it is measured, and who decides when and how to respond.
Market liquidity · Bond market · Session 2
vs largest two members' default, illustrative
| Settlement fails | 66 | ▲ 2 | Normal |
| Margin calls intraday | 8 | ▲ 1 | Elevated |
| Surveillance alerts | 94 | ▲ 29 | Triage |
Fig.Market liquidity and clearing monitor. Design wireframe with placeholder names and illustrative values, not a record or a live system.
Market liquidity is the ability to trade a meaningful amount quickly without moving the price much; funding liquidity is the ability to finance a position or meet a margin call. The two reinforce each other, and when both fail, as in a dash for cash, even safe government bonds can become hard to sell.
How a failure at one financial centre can spread through settlement links. Design links, not real dependencies.
Dislocation and funding stress. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.
Dealers absorb order imbalances on their balance sheets. Leverage, capital and risk limits cap how much they can hold, so a surge of one-sided selling meets a hard limit and prices move further than fundamentals alone would explain.
Falling prices raise margins and haircuts, which force leveraged holders to sell, which lowers prices again. Market and funding liquidity drain together, and the assets most used as collateral can be hit first.
When many investors seek cash at once, even the safest and most liquid assets are sold to raise it. Open-ended funds with daily redemptions, money market funds and leveraged relative value trades can all add selling into the same market.
Stress spreads through common holders, shared collateral and funding links: from sovereign bonds to repo, from repo to derivatives margin, and across borders through currency funding markets and the cross-currency basis.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Liquidity spiral | A feedback in which falling prices raise margins and force sales that push prices down further. |
| Repo | A sale of securities with an agreement to repurchase them, used as secured short-term funding. |
| Cross-currency basis | The deviation from covered interest parity that measures the cost of borrowing one currency against another. |
Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Quoted and effective bid-ask spread | basis points | intraday | Trading venue and dealer quotes | OBSERVED |
| Order book depth at the best prices | currency units | intraday | Exchange and electronic platform order books | OBSERVED |
| Price impact per unit traded | basis points per currency unit traded | daily | Trade and quote data | ESTIMATED |
| Repo rate spread over the policy rate | basis points | daily | Published repo reference rates | OFFICIAL |
| Cross-currency basis | basis points by currency pair and tenor | daily | FX swap and cross-currency swap prices | OBSERVED |
| Money market fund net flows | currency units by fund type | weekly | Regulatory fund filings and industry reports | REPORTED |
| Variation margin called by central counterparties | currency units | daily, disclosed quarterly | CCP public quantitative disclosures | REPORTED |
| Financial stress index | index points | daily | Composite indices such as the OFR Financial Stress Index and ECB CISS | MODELLED |
The topic as a computational graph: named sources feed the methods, an evidence review gates the outputs, and the decisions stay with the authorities that hold them.
Fig. 02Nodes carry their type, two metric rows and a state; connectors show what feeds what; dashed frames name the owners; the timeline is the cadence. Design of the pipeline, not a record of a run.
Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.
| Source | What it gives | Licence class |
|---|---|---|
| OFR Financial Stress Index | Daily composite of market-based stress measures across credit, equity valuation, funding, safe assets and volatility | Public domain, US government work |
| OFR Short-term Funding Monitor | Repo and money market rates and volumes, including cleared and bilateral repo | Public domain, US government work |
| ECB Composite Indicator of Systemic Stress | Euro area stress index combining money, bond, equity, foreign exchange and financial intermediary segments | Free, ECB reuse terms with attribution |
| SEC Form N-MFP data | Holdings, flows and liquidity of US money market funds | Public domain, US government records |
| FSB Global Monitoring Report on Non-Bank Financial Intermediation | Size, composition and risk metrics for non-bank financial intermediation across jurisdictions | Free, FSB terms of use |
| BIS Quarterly Review and BIS foreign exchange statistics | Analysis of market functioning, dollar funding and foreign exchange swap markets | Free, BIS terms of use with attribution |
| IMF Global Financial Stability Report | Assessment of market liquidity, leverage and vulnerabilities across the global financial system | Free, IMF copyright and usage terms |
Capital Markets Nexus prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.
| Who decides | The question | Evidence this page serves |
|---|---|---|
| Central banks | Whether a dislocation warrants a liquidity facility, asset purchases or a change to standing operations | Spread, depth, repo and basis indicators with their sources and timeliness |
| Securities regulators | Whether fund liquidity management tools and redemption terms match the liquidity of fund assets | Fund flow, holdings and liquidity mismatch evidence from regulatory filings |
| Central counterparties | How to set margin models so that calls in stress are predictable and not excessively procyclical | Margin call history and procyclicality measures from public disclosures |
| Finance ministries and debt management offices | Whether government bond market structure needs changes such as wider central clearing | Market depth, dealer capacity and repo market evidence |
In calm periods, dealers and market makers absorb order imbalances using their balance sheets. Under stress, risk limits, capital requirements and funding costs reduce their willingness to do so just as many investors want to sell. Spreads widen, depth falls and prices can gap.
Demands for cash concentrate in stress: margin calls on derivatives, redemptions from open-ended funds and the need to roll short-term funding. Participants sell their most liquid assets first, which can transmit stress to markets usually considered safe. Liquidity spirals arise when falling prices trigger further margin calls and sales.
Bid-ask spreads, depth, price impact and turnover, using econometrics. Each metric captures one dimension, and calm-period values say little about stress.
Analysing past dislocations to understand drivers. Each episode is partly unique.
Repo rates, haircuts and volumes, with financial economics and macro-finance. Bilateral repo data are partly opaque.
Exploring liquidity demands under shocks, presented under scenarios. Behavioural assumptions dominate results.
The current service level is R0: information and enquiries. An enquiry receives a reference and names the next step; applications, payments, compute allocations and registrations open only when their team, terms and review capacity exist.