Corporate Liquidity Risk Management : Coping With Corona and the Clearing Obligation

The European Markets Infrastructure Regulation (EMIR) allows burdening a clearing obligation on non-financial corporations, which formerly did not necessarily clear their business. We give 10 recommendations on how to cope with this obligation. These are motivated by a case study for which we consider a stylized German power producer. For this entity, we derive optimal levels of planned production and forward sales of power using microeconomic theory. Since this results in a significant short position in the German power forward market, we investigate the resulting variation margin call dynamics with a special interest in the ability to forecast worst-case price up moves. We compare different models for the forward log-returns and their performance in 99% quantile forecasting. A GARCH model with Student-t distribution emerges as the most suitable model. This is used in the case study, which is inspired by data published by the power producer E.ON. Using recent material from the Basel Committee on Banking Supervision we distill the reliable liquidity buffer from an allegedly rich liquidity position and show how suddenly it can be eroded. We point to feedback loops, which make the challenges—posed by the clearing obligation—even more severe. We also spend some thoughts on how to cope with the crisis caused by Corona