Post by Sapphire Capital on Nov 14, 2013 1:16:07 GMT 4
New Regulations and Collateral Requirements – Implications for the OTC Derivatives Market
International Monetary Fund (IMF)
October 10, 2013
SWIFT Institute Working Paper No. 2012-004
Abstract: The paper provides a snapshot of the changing collateral space and how this will impact the regulatory push to move over-the-counter (OTC) derivatives to CCPs. With continued quantitative easing (QE) by some central banks, price signals from the repo market indicate a shortage of good collateral. This paper focuses on the collateral demand in the OTC derivatives market as they move to central counterparties (CCPs) and suggests alternatives on how to reduce risk in this market.
The proposed route of removing OTC derivatives from banks books creates new SIFIs, destroys the economics of netting on the books of the banks, silo(s) collateral and decreases collateral velocity, and increases the interconnectedness of the financial system. Alternately, if every user of OTC derivatives contributed their share of margin(s) when using OTC derivatives (relative to the proposed bifurcated “clearing” and “non-cleared” worlds including legacy trades that will not clear), the risk from derivatives at SIFIs would be eliminated. There would be no need for CCPs.
General information only, this is no legal or financial advice or legal opinion and no solicitation or offering of services. Use of posted information should be contingent on your counsel advise on a case by case basis.