A survey of financial market participants most likely to be negatively affected by new regulations on uncleared swap trades revealed that they don’t like this new-fangled way of doing things at all. No, no, they really don’t.
The completely predictable result was published in an article in Risk on Wednesday: 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
Dressing up a pig as a princess, doesn’t make the pig a princess, and concentrating all the counterparty risk in the financial system into one place, doesn’t make it vanish. It’s still there. For the most part.
Given that you haven’t done anything with the risk other than shift it, the logical conclusion is that regulators have to be ready to either backstop or wind-down a central counterparty (CCP) in order to prevent some potentially rather cataclysmic disruption to markets. Read more
It’s no coincidence that with the shift to central clearing looming on the horizon, the Bank of England’s director for financial stability is talking about this subject.
Haircuts, that is. 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
Via Bloomberg (H/T Chris Whittall):
Lawmakers in the [European] Parliament voted that clearinghouses should have to hold capital of at least 10 million euros ($14.1 million) to absorb possible losses… Read more
That’s $29bn for just five banks with derivatives deals covered by one-way credit support annexes (CSAs).
For the entire financial system it might be closer to a whopping $150bn, according to Risk’s clever Duncan Wood. Read more
Currently doing the rounds — an alleged instance of derivatives fraud, or at least, mispractice. With individual names (Omer Rosen) and banks (Citigroup) attached.
It’s written for the Boston Review, by Rosen, and titled ‘Legerdemath.’ 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
To post collateral or not to post collateral?
That is the sovereign derivatives question of the week. Read more
Confused about just how the Dodd-Frank Act would actually change derivatives markets? Happily, Barclays Capital’s Rajiv Setia and team have tried an answer.
Not so happily, the answer is a bit disconcerting. Read more
Financial blogger Alea points to this paper on clearing houses ahead of OTC derivatives reform:
Are we building the foundations for the next crisis already? The case of central clearing Read more
Someone call in a ref, FT Alphaville says. It’s the clash of the clearing houses, who are trading blows over who has the best standards for the margin deposits houses require from their customers in order to cover the risk of default. The tensions are clear: regulators want high margins, but houses want to stay competitive. Read more
LCH.Clearnet has accused some of its global rivals of using loose standards to assess the amount of insurance traders must take out against a catastrophic default, in an apparent attempt by Europe’s largest independent clearing house to win business, the FT says. The development is a sign some clearing houses are trying to highlight the dangers of “competing on margin” – that is, lowering the minimum funds that must be posted by market participants to a clearing house to guard against failures. 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
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3Spain's awful unemployment
4Pump up, debase
5S&P 2,100, by Goldman Sachs
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8Buyback to enrich
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