Collateral, Netting and Systemic Risk in the OTC Derivatives Market

April 1, 2010

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Format: Chicago

Manmohan Singh. Collateral, Netting and Systemic Risk in the OTC Derivatives Market, (USA: International Monetary Fund, 2010) accessed October 6, 2024

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.

Subject: Central counterparty clearing house, Collateral, Credit default swap, Derivative markets, Financial institutions, Financial markets, Financial sector policy and analysis, Money, Systemic risk

Keywords: CCPs, Central Clearinghouse, Central counterparty, Central counterparty clearing house, Collateral, Credit default swap, Credit default swap position, Derivative, Derivative contract, Derivative markets, Derivative payables, Derivative receivables, Europe, Margin, Netting, OTC derivative, OTC derivatives, Payables, Systemic risk, Well functioning CCP, WP

Publication Details

Pages:

15
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/099
Stock No:

WPIEA2010099
ISBN:

9781451982763
ISSN:

1018-5941

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