BIS: Clearing CDS through a CCP could cost “G14 dealers” $100B in margin requirements

Daily Collateral's picture

The Bank for International Settlements published a nice working paper this morning ("Collateral requirements for mandatory central clearing of over-the-counter derivatives") that lays out a framework for calculating the costs to the towering derivatives complex of moving forward with regulatory reform to make mandatory clearing of credit default swaps and interest rate swaps through central counterparties.

Statistical types may enjoy examining the methodology used in the paper to "fill in the blanks" given the sparse data available on the makeup of swaps actual portfolios, but suffice it to say that the main finding is that certain banks in a group known as the "G14 dealers" -- the most active in the OTC derivatives space -- could find themselves on the wrong end of major margin calls under a CCP arrangement in the inevitable event of periods of high market volatility.

Here are the data that were estimated using the framework advanced in the paper. Note, for example, that the grey cells in the interest rate swaps (IRS) table on the left are essentially total notional amounts in IRS books divided 50-50 between long and short positions, as this breakdown is not publicly available:

Then, the paper takes these hypothetical portfolios designed to represent the G14 dealers' books based on available information and measures their reaction to different levels of volatility in CDS and IRS observed over the past several years. The chart on the left is the four-year euro fixed-for-floating and the one on the right is JPMorgan 5-yr senior CDS. They both show daily changes in market values measured as percentages of notional principal amounts:

Applying three different levels of historical volatility as observed above to the G14 dealers' constructed portfolios, "dealer 6" (i.e. DB per the list above) could be looking at $8 billion in potential variation margins in the event another Lehman-style situation, while "dealer 9" (i.e. JPMorgan) could also face staggering margin calls of over $5 billion:

The interest rate swaps add a nice chunk of change to margin requirements in periods of high volatility as well:

Finally, the total initial margins required by all of the G14 dealers in the event of a period of high market volatility could be over $100 billion for CDS portfolios alone...

...and around another $42 billion on IRS books:

One can see how things could get expensive.



Recent articles:



Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
VelvetHog's picture
"BIS: Clearing CDS through a CCP could cost “Citizens” $100B in margin requirements


Cured it.

Cult of Criminality's picture

Derivative - meaning > derived or taken from another

Websters dictionary 1960

Derivative is 8 words down from Derelict

Derelict - A person that has lost respectability.

 By the way , Anybody seen Corzine ?

falak pema's picture

1T if Greek goes bust and 100 B if the CDS scam is regulated and no more OtC; the math is simple for these bankster shills!

According to the same IIF...

SillySalesmanQuestion's picture

BBB = Blowup Before Bailout

Nobody For President's picture

It seems to me TPTB have got themselves into a bind: philosophically, they are very much against regulation of derivates (duh - understatement of the year) - because of the huge amounts of money and bonuses to be made.

On the other hand, unless they are a lot blinder than I think they are, there may be a creeping understanding that they HAVE to regulate these bastard sons of Bear Stearns, Lehman, GS and JPM et al, or the whole shiteree is goin' blow up on them and the party will really be spoiled.

The best bet for them would be a 'voluntary' organization (i.e. not gobermint) to establish a 'clearinghouse' of some sort to at least list the instruments and basic pricing (way beyond what presently exists). Poisen to some, but the alternative (government intervention and regulation - starting in the EU of course, the USA Congress and executive branch is bought off) is worse. Like ISDA, such a clearinghouse will be industry corrupted to the core, but will be a start on getting a handle on a clearly out of control bunch of shit that can and will bring it all down if some sort of reins, even very weak ones, are not put on - and put on soon.

Clowns on Acid's picture

Guess the banks have to begin cutting their possies soon. If they had to clear / collaterize their positions earlier, bubbles would have been a more difficult to create.

No banksters No cry. 

ItsDanger's picture

Under a Lehman situation, the margin might actually be higher given its a default.  The interest rate & credit default swaps would be treated differently for obvious reasons.  I would think the credit default swap margin would increase 100-1000%.  The margin req'd would have to have counterparty & contract breakdown.  Quite difficult.  Unless streamlined swap terms were enforced.

Schmuck Raker's picture

"One can see how things could get expensive."

For Taxpayers....again.

NotApplicable's picture

Hmmmm... So, am I seeing a $100B increase in the size of the rehypothetication pool?

Hope nobody pees in it.

Nobody For President's picture

It's so big, it doesn't the fuck matter.

Sutton's picture

Just keep it off balance sheet.  No one puts a dime up.  Worked great in 2008.


eatthebanksters's picture

No one puts a dime up...what was TARP?  Who pays if these guys screw up enough that bonuses don't get paid out? 

DavidPierre's picture

Occam's Razor ... Bitch!

 Lex Parsimoniae ! 

The law of parsimony, economy or succinctness. It is a principle urging one to select among competing hypotheses that which makes the fewest assumptions and thereby offers the simplest explanation of the effect.



What a week it will be! Don't worry, it's coming! For Gold watchers... Watch Wednesday.

Dennis Gartman chimed in about last weeks massacre ... saying something nefarious could have taken place in one pompous breath, and of course poking fun at by talking down to and basically trashing Gold bugs as usual.

Can't argue with someone who doesn't understand the argument.

Hard money advocates, Gold bugs whom Mr. Gartman constantly makes fun of, have been correct for at least the last 40+ years. They have been right, and right for all the right reasons.

This past Wednesday, finally and very publicly put an end to conspiracy theorists being considered nuts.

As it turns out, anyone who towed the mainstream lines of investment logic since at least 1971 have been wrong. It has taken many decades for the proof to arrive. It finally has. No one can deny now that too much debt is the problem and has been the problem building for 40 years or more.

More debt cannot be the solution. Without unfairly pounding his royal pompousness with no chance to defend himself... Dennis feels easily threatened. Mr. Gartman needs to question whether or not Gold and Silver have been manipulated in price. He can no longer say "it doesn't matter, or I don't care" like Jeff Christian does.

It does matter.

You should care because it has, is, and will affect you, your children, your children's children and everyone else on the planet! So there it is. Treat Gold bugs with the respect that they deserve and have earned... despite his and other's constant ridicule.

Debate publicly... here on ZH would be a good start... or just STFU and go away!

Back to this week. China has become an aggressive seller of U.S. Treasuries. The ECB created another $700 Billion out of thin air while Greek one year paper traded near 1,000%. At the same time ISDA said that no default has occurred and now anyone who purchased CDS for protection is butt naked and sitting on unrecoverable losses. Make the mental leap forward ... backward... this insurance isn't and never was, insurance. It could not and cannot be paid out.

The money... the reserves, whatever the fuck they call it has never and can never exist.

What idiot would go to JP Morgan, Credit Suisse, AIG or whoever to insure their U.S. Treasury bonds? What paper financial entity on the planet will still be alive if the U.S. Treasury fails? Are we only talking about Greece right now? The European sovereign's and thus Germany and the ECB itself are coming soon, and then ultimately the U.S. Treasury.

Inside the system, the Rotting House, there is no place to hide.

There is no magical product or insurance or CB policy that has the ability to protect you. The only protection is to go outside... out of the paper system. The only insurance is in Gold and it's little sister Silver. The fact that global physical demand is much greater than actual supply ... has been for 40+ years. Volume and open interests on the paper markets are dropping as investors say 'no mas' and are leaving the rigged and rotten casino. Even though The Fed and ECB are flooding the markets with more and more liquidity, the tide is continuing to recede and naked insolvency’s everywhere are continuing to be exposed.

This week is important. We will get intuitive action. We will get some answers!

Now for sure central banks will provide liquidity to and beyond infinity. We now know that the rule of law is no longer.

The ISDA ruled that default isn't default.

If you own CDS... well... that's just too damn bad.

MF Global was thrown under the bus. A bus filled with Mafia thieves will land on 'free parking'.

No one will be prosecuted. This was the greatest Rot of all. The end of the road for fiat.

The rule of law is lost... exactly what is happening.