Counterparty Risk, Impacton Collateral Flows and Role for Central Counterparties
IMF Working Papers, August 1, 2009
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Bibliographic details
- Authors: James Aitken, Manmohan Singh
- Published: August 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451873207.001
Summary findings
- Counterparty risk in the United States stemming from exposures to OTC derivatives payables (after netting) is now concentrated in five banks: Goldman Sachs, JPMorgan, Bank of America, Morgan Stanley and Citi.
- The note analyzes how such risks have shifted over the past year.
- The authors estimate that the adverse impact of counterparty risk on high-grade collateral flows and global liquidity due to decrease in rehypothecation, reduced securities lending, and hoarding of cash by major banks is at least $5 trillion.
- Regulatory initiatives have been taken to establish central counterparties (CCPs) to mitigate counterparty risk.
- From a policy perspective:
- Counterparty risk remains large at present.
- Recent experience has shown that OTC derivative positions are not supported by sufficient capital, constituting a major risk for participants in this market.
Mechanisms affecting collateral and liquidity
- Decrease in rehypothecation.
- Reduced securities lending.
- Hoarding of cash by major banks.
- Concentration of derivatives payables exposures (after netting) in five major banks increases systemic vulnerability.
Policy implications and role of CCPs
- Establishing central counterparties (CCPs) is a key regulatory initiative aimed at mitigating counterparty risk.
- The persistence of large counterparty risk and insufficient capital backing for OTC derivative positions imply elevated systemic risk for market participants.
Keywords and subjects (as listed)
- Subjects: Asset and liability management, Banking, Central counterparty clearing house, Collateral, Currencies, Derivative markets, Financial institutions, Financial markets, International liquidity, Money
- Keywords: Central Counterparties, central counterparty, Central counterparty clearing house, Collateral, Collateral Flow, commodity derivative, counterparty risk, Currencies, derivative, derivative activity, derivative buyer, derivative deal, Derivative markets, derivative obligation, derivatives payables, derivatives payables position, derivatives receivables, equity derivative, Global, International liquidity, Large Complex Financial Institutions, market, OTC derivative, OTC derivatives, risk, WP