Many derivatives markets use collateral requirements calculated with industry-standard but dated methods that are not designed with systemic risk in mind. This paper explores whether the conservative nature of conventional collateral requirements outweighs their lack of consideration of systemic risk.

To investigate this issue, we calculate a new systemic risk metric: the expected systemic market shortfall. We analyze the composition of systemic risk across firms both before and after applying conventional collateral requirements.

Our results show that the conservative nature of conventional collateral levels does buffer systemic risk adequately and results in only small risk spillovers above collateral. These spillovers do not meaningfully add to banks' pre-existing systemic risk. We verify the robustness of this result by exploring alternative systemic risk measures, allowing for an implausibly large margin of error. Even under the most extreme scenario, the maximum market-wide shortfall in excess of collateral barely reaches 1 per cent of banks' market capitalization. This maximum shortfall therefore does not exceed the effect of a 1 per cent decline in stock price.