In the third part of our series looking at the implementation of the European OTC clearing mandate, David Wigan updates on the challenges posed by higher collateral requirements.
At the heart of the
financial crisis was the crippling impact of counterparty risk,
the apparently simple antidote to which was a regulatory
requirement for more collateral. However, as market
participants prepare for central clearing, and higher levels of
collateralisation, they face a bewildering array of choices and
an eye-watering increase in costs.
Collateral requirements for central clearing, bilateral credit
support agreements and exchange traded derivatives are
estimated to be somewhere between about $500 billion and $2.6
trillion. Analysts at Morgan Stanley estimate the cost of
moving to clearing alone will be $481 billion of additional
The huge jump in
collateral requirements comes at exactly the same time that
banks are deleveraging their balance sheets, market liquidity
is declining and asset quality in some key derivative markets
is trading close to all-time lows.
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