“What happens when one bank defaults across six CCPs? The remaining members will have to pick up the bill. Given that they are almost certainly members of the other CCPs, this will result in a default contribution bill so large it could potentially lead to their failure also.”
That’s Gary Dunn, senior manager for regulatory and risk analytics at HSBC, being quoted by Risk at Isda’s AGM last week. Given the increasing concentration of risk in central counterparties, he thinks that they would ultimately have to be bailed out by taxpayers, after the CCP’s buffers were exhausted. Read more
If you read some of the regulations written recently, you may be forgiven for thinking that central clearing is the solution to all the risks in the over-the-counter (OTC) derivatives market. Some rules mandate clearing for certain market participants and trades, while others impose higher capital requirements for staying outside of the system. There is, of course, an implicit assumption in all of this that central clearing is an unequivocally good thing.
If only it were that easy. In fact, there are lots of issues with OTC derivatives clearing. Today, we’ll just look at one aspect: that of margin. Read more
We can’t ignore the (extraordinary) latest on the fall of Bo Xilai. Probably nobody who follows China as a market can, we suppose.
The Xinhua story on the arrest of Bo’s wife speaks for itself… Read more
If left standing when the music stops, you may still be trying to get your assets back years later.
While a deterioration in a bank’s creditworthiness may lead to a rather pleasurable accounting profit, it can have a negative impact too. As IFR’s Christopher Whittall and Helene Durand point out, clients don’t like it so much that their prime broker’s credit spreads are widening out and some have been reacting by shifting their trades elsewhere. Read more
Did you notice this bit from the reams of CRD IV material released on Wednesday?
Where an institution acting as a clearing member enters into a contractual arrangement with a client of another clearing member in order to ensure that client the portability of assets and positions referred to in point (b) of paragraph 5, that institution may attribute an exposure value of zero to the contingent obligation that is created due to that contractual arrangement. Read more
It’s an answer — of sorts — to the $2,200bn dollar question. Read more
Encumbrance – along with collateral-shortage — is one of our favourite post-financial crisis terms.
A new paper from the Bank for International Settlement’s latest Quarterly Review deals with both in relation to central clearing, scheduled to cover all OTC derivatives by the end of next year. Read more
And dare we say, a glimpse into the future?
Regulators around the world seem set to install central counterparties (CCPs) as part of their efforts at post-financial crisis reform. But not without criticism — some commentators have likened their efforts to creating a series of AIG-type companies, or Too Big to Fail institutions, acting as insurers. Read more
Silver prices rose by over 60 per cent between the start of the year and April 25.
They’ve now fallen by over 30 per cent — unwinding some 80 per cent of the upward move in the space of two weeks, according to Société Générale figures. Such violent swings have lead to margin call hikes on the precious metal (along with other commodities) at the Chicago Mercantile Exchange, and have also unleashed a wave of debate about just how much margin moves may have attributed to price falls. Read more
Basel is busy bolting stable doors.
Indeed, one of the big drivers behind new Basel III counterparty risk capital requirements is the infamous negative basis trade. Read more
All hail the Depository Trust and Clearing Corporation
The DTCC has provided an updated and more in depth version of its market “snapshot” of CDS trade — six-month data for the top 1,000 CDS single-named reference entities. It’s aimed at “informing” market participants and regulators which names might have sufficient liquidity to be cleared through a central counterparty. Read more
You may have heard that the signing of financial reform in the US wasn’t just the end of a long and difficult process but also the beginning of another, with a host of federal agencies given discretion to study and define the rules for the areas they oversee.
Thursday’s FT includes a comprehensive article looking at the unresolved issues for derivatives, and we think it’s worth highlighting a few of its main points. Read more
This is a big one: Fannie Mae and Freddie Mac will start using central counterparty clearing on their massive interest rate swaps portfolio, according to a Reuters report.
It’s worth noting that the combined size of Fannie and Freddie’s interest rate portfolio is $3,000bn – or about than 0.5 per cent per cent of the gross market value of the global interest rate swap market, according to BIS data as at June 2009. Read more