The world's largest derivatives dealers may need to provide more collateral to ensure the stability of central clearing counterparties as over-the-counter deals move to central clearing, according to the Bank for International Settlements.
By the end of 2012, all standardised over-the-counter (OTC) derivatives will have to be cleared through central counterparties (CCPs). This BIS paper estimates the financial resources that different CCPs would need to clear safely the full volume of interest rate swaps and credit default swaps currently held by major derivatives dealers. The results suggest that these dealers already have sufficient unencumbered assets to meet initial margin requirements, but that a few may need to increase their cash holdings to meet variation margin calls in a timely way.
The study also find that the potential costs of individual or multiple dealer defaults for CCPs and their non-defaulting clearing members are likely to be small relative to their equity as long as CCPs factor into initial margin requirements the extent of tail risk and time variation in risk of different types of derivatives. Finally, clearing different types of OTC derivatives in a single CCP could reduce both margins and collective loss-absorbing resources.» Download the document now 244.4 kb (PDF File)