Mandatory Centralised Clearing - Creating a liquidity crisis?
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Co-presentation with Nicole Grootveld [Cardano] on the liquidity issues presented by the introduction of mandatory clearing for OTC derivatives. Includes commentary on the buy-side and some potential solutions to the issues created.
![[object Object],[object Object],[object Object],[object Object],Liquidity Impact of Margining Buy-Side users of derivatives with “one way” positions impacted the most OTC Derivatives Market / CCP Scope Buy-Side Mortgage Bank Sell-Side Dealer fixed floating fixed floating fixed Pension Holders Buy-Side Pension Fund fixed Mortgage Holders](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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Mandatory Centralised Clearing - Creating a liquidity crisis?
- 1. Mandatory centralised clearing Creating a liquidity crisis? Nicole Grootveld, Cardano John Wilson 25 March 2011
- 3. Liquidity Impact Central Clearing For example EUR 1 billion 30 year interest rate derivative & 1% rate increase Largest Impact Pension Fund will need to Post EUR 270 million in total margin Liquidity issue to the extent existing Asset not eligible for margining (cash vs bonds) Buy-Side Mortgage Bank CCP fixed floating fixed floating fixed Pension Holders Buy-Side Pension Fund fixed Mortgage Holders Variation Margin EUR 150 mln Variation Margin EUR 150 mln Initial Margin EUR 120 mln Initial Margin EUR 120 mln Day 1 Both counterparties must finance and post Initial Margin at moment of new trade execution
- 4. fixed floating fixed floating fixed Pension Holders fixed Mortgage Holders Liquidity Impact Central Clearing For example EUR 1 billion 30 year interest rate derivative & 1% rate decrease Largest Impact Mortgage Bank will need to finance an additional EUR 120 million in margin versus bilateral CSA margining Cost of financing this extra margin to be passed on to mortgage holders in form of higher mortgage rates Buy-Side Mortgage Bank CCP Buy-Side Pension Fund Initial Margin EUR 120 mln Initial Margin EUR 120 mln Variation Margin EUR 150 mln Variation Margin EUR 150 mln
Notas del editor
- 10/05/11 09:08 AM
- 10/05/11 09:08 AM
- 10/05/11 09:08 AM
- 10/05/11 09:08 AM
- 10/05/11 09:08 AM Confusion abounds Proposals are focused on the simple instruments not the complex structured credit where opacity may have contributed to the problems Proposals relate to clearing not trading – private transactions in complex instruments are not covered Impact of failure of SCM is mitigated and absorbed by CCPs default protections because Mutualisation among CCPs SCMs should margin posted by defaulting SCM be insufficient Lowering exposures through multi-lateral netting Initial margin held against default of any SCM Initial margin Defaulting SCM’s contribution to CCP’s Guarantee Fund Remainder of Guarantee Fund Transparency Maintain transaction records (notional amounts and counterparties’ identities (DTCC and TriOptima share information with Regulators)