In Crisis, Sell What You Can, Not What You Should

During periods of stress, risk management becomes crucial as margin requirements increase, indicating deleveraging within firms. There's a potential spillover effect on the broader market when different teams within a firm engage in various trades without knowledge of each other's positions. This lack of communication can lead to situations where a short position in one asset class can trigger broader repercussions when risk constraints tighten. In times of market volatility, firms may sell off assets that are easier to liquidate, rather than those most affected, due to operational constraints. Additionally, there's a pressing need for more refined data collection on FX swaps to better understand who initiates these trades and their implications, especially as the financial system evolves from being bank-centric to a more market-based structure.