One of the biggest concerns over the implementation of the OTC clearing mandate is the vast amount of additional collateral that will be required. In the latest in our OTC clearing series, William Mitting explores how the collateral squeeze could be mitigated.
Estimates on the amount of additional collateral required
under the G20 mandate to clear standardised OTC derivatives
vary from the hundreds of billions to the trillions. Coming as
regulation and financial prudence is already pushing up capital
ratios, this collateral squeeze represents one of the largest
challenges to the implementation of the OTC clearing
The additional collateral requirements of OTC clearing are
inescapable. Indeed, one of the key motivations for the move to
OTC clearing is to increase the level of margin posted against
OTC derivatives contracts. However, there are a number of
initiatives that can ease the collateral squeeze from banks and
technology providers offering collateral optimisation and
transformation services to CCPs accepting a wider range of
instruments as collateral or offering cross-margining across
Under the bilateral OTC framework, few buy-side firms were
required to post substantial initial margin and often no
variation margin. In a 2010 report, Tabb Group said that moving
the plain vanilla IRS customer-to-dealer business to central
clearing would require an additional $240bn in collateral.
Moving all OTC derivatives would need over $2.2tr, the research
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