Collateral, Netting and Systemic Risk in the OTC Derivatives Market

Author/Editor:

Manmohan Singh

Publication Date:

April 1, 2010

Electronic Access:

Free Full Text (PDF file size is 473 KB).Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

To mitigate systemic risk, some regulators have advocated the greater use of centralized counterparties (CCPs) to clear Over-The-Counter (OTC) derivatives trades. Regulators should be cognizant that large banks active in the OTC derivatives market do not hold collateral against all the positions in their trading book and the paper proves an estimate of this under-collateralization. Whatever collateral is held by banks is allowed to be rehypothecated (or re-used) to others. Since CCPs would require all positions to have collateral against them, off-loading a significant portion of OTC derivatives transactions to central counterparties (CCPs) would require large increases in posted collateral, possibly requiring large banks to raise more capital. These costs suggest that most large banks will be reluctant to offload their positions to CCPs, and the paper proposes an appropriate capital levy on remaining positions to encourage the transition.

Series:

Working Paper No. 10/99

Subject:

English

Publication Date:

April 1, 2010

ISBN/ISSN:

9781451982763/1018-5941

Stock No:

WPIEA2010099

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

15

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