Corporate hedgers are battling against mandatory clearing for OTC derivatives. Why? asks Philip McBride Johnson. The costs are modest and the benefits compelling.
that use derivatives for hedging have been heavily resisting
the Dodd-Frank Act’s move to steer some/most/all
private derivatives transactions – swaps, for example
– on to regulated markets backed by clearing
The reason? They don’t want to have to post
margin (otherwise known as collateral) on their open positions.
All existing clearing houses impose this obligation as part of
their safety net against default by any participant.
The objections of the 'end users’ focus on two
First, that posting margin will impose an unreasonable
burden on their finances, tying up large amounts of money in a
broker’s account that could be more profitably
applied to other purposes.
Second, the critics argue that if margin must be posted, it
should be protected against seizure by the clearing house when
some other participant defaults. At present, a clearing house
can use margins belonging to any customer to meet a default by
any other customer, with the full blessing of regulators.
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