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Collateral, Netting and Systemic Risk in the OTC Derivatives Market

Author/Editor: Singh, Manmohan
Authorized for Distribution: April 1, 2010
Electronic Access: Free Full Text (PDF file size is 484KB)
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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.
 
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Series: Working Paper No. 10/99
Subject(s): Asset management | Banks | Capital | Capital markets | Credit risk | Financial institutions | Financial instruments | Financial risk | Securities regulations
Author's keyword(s): Collateral; Netting; Margin; CCPs; OTC derivatives; Central Clearinghouse
 
English  
    Published:   April 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010099   Pages:   15
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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