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Banks Sprint to Meet $493 Trillion Swaps Market Margin Rules

50 points by 6stringmerc 10y ago

et-al 10y ago
This is news to me. What happens if the banks don't meet their collateral requirements? A fine? Secondly, I assume this will cause interest rates to go up as a way for banks to incentivise people to save money?
- ChuckMcM 10y ago
  I was wondering if they would approach companies like Apple with a lot of off shore cash.
  - lucozade 10y ago
    Wouldn't at all surprise me if Apple's treasury department already lend out to banks.
    - Dwolb 10y ago
      Apple have their own hedge fund to help manage their assets [1]. [1] https://en.wikipedia.org/wiki/Braeburn_Capital https://en.wikipedia.org/wiki/Braeburn_Capital
- lucozade 10y ago
  > What happens if the banks don't meet their collateral requirements? That's equivalent to a default on the contract. It'll end up in a legal settlement whereby the currently posted collateral, if any, will be used in the settlement. The general idea with collateral is to ensure that, if one or other counterparty defaults, the net loss for the non-defaulter is kept relatively small. BTW the regulation change that this article refers to is really just a change in how certain collateral balances are calculated. It's a pain for the banks as there are lots of regulators who don't really agree and keep changing their minds. Also, you now have to "show your working" more or you get hit with a punitive charge. It's not conceptually hard but requires a lot of coordination both inside the banks and between the banks and regulators.
trhway 10y ago
considering that mortgage CDS-es total was on the scale of only $1T and it was enough to sink the economy...
- bjterry 10y ago
  Notional values can not be usefully compared between asset classes. That's why it's so dumb that people keep reporting them in the media. Comparing $1T of CDS to $493T of derivatives is like comparing Fahrenheit numbers to Celsius numbers. Comparing either of those to GDP is like comparing Fahrenheit and Calories.
  - elif 10y ago
    What about comparing it to the world's total debt? that figure is more than double the current debt of the entire world (230T). Does the act of re-packaging that 230T really create an additional 263T in value? And even if so, is that not a hopeless feedback loop?
    - ddeck 10y ago
      I'm not sure what comparison you're trying to make. These derivatives are typically used modify the cashflows of those instruments for different issuer/investor preferences. The vast majority (>90%) of that OTC derivative figure is interest rate andFX swaps and the gross market value of those swaps are less than $15 trillion. The aggregate notional principal has also been declining for the last several years. Here's an example trade: I'm a European company and I've determined there's demand for my USD fixed rate bonds in America, but I need EUR to invest in my business and my profits are linked to interest rates so it's less risky for me to pay a floating interest rate. So to reduce my risk, I need to swap the bond cashflows into EUR and the fixed rate payments into floating rate payments. I issue $100 of bonds to US investors, and then I execute a $100 notional fixed-floating FX swap with a bank. That bank then executes a $100 notional fixed-fixed FX swap with another counterparty and a $100 notional (EUR equiv) rate swap with a different counterparty. So we have $300 notional value of OTC swaps and a $100 bond. And if we take out the central counterparty, the three swaps actually net into a single $100 swap.
phantom_oracle 10y ago
Financial firms dislike the idea of letting money sit idle, unless they are getting negative rates. What happens to that $300+ billion ~ $3.6 trillion collateral? I'm sure it will find its way into an investment as well.
- minimax 10y ago
  The collateral isn't limited to cash. Eligible collateral for initial margin includes cash, debt securities that are issued or guaranteed by the U.S. Department of Treasury or by another U.S. government agency, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, multilateral development banks, certain U.S. Government-sponsored enterprises’ (‘‘GSEs’’) debt securities, certain foreign government debt securities, certain corporate debt securities, certain listed equities, shares in certain pooled investment vehicles, and gold. From here: https://www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.pdf https://www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.p...
  - zbobet2012 10y ago
    Wow, tbh invest in our (or our allies) bonds is an interesting way to structure this for sure.
deleted 10y ago
[deleted]

50 points by 6stringmerc 10y ago

et-al 10y ago

This is news to me. What happens if the banks don't meet their collateral requirements? A fine? Secondly, I assume this will cause interest rates to go up as a way for banks to incentivise people to save money?

ChuckMcM 10y ago
I was wondering if they would approach companies like Apple with a lot of off shore cash.
- lucozade 10y ago
  Wouldn't at all surprise me if Apple's treasury department already lend out to banks.
  - Dwolb 10y ago
    Apple have their own hedge fund to help manage their assets [1]. [1] https://en.wikipedia.org/wiki/Braeburn_Capital https://en.wikipedia.org/wiki/Braeburn_Capital
lucozade 10y ago
> What happens if the banks don't meet their collateral requirements? That's equivalent to a default on the contract. It'll end up in a legal settlement whereby the currently posted collateral, if any, will be used in the settlement. The general idea with collateral is to ensure that, if one or other counterparty defaults, the net loss for the non-defaulter is kept relatively small. BTW the regulation change that this article refers to is really just a change in how certain collateral balances are calculated. It's a pain for the banks as there are lots of regulators who don't really agree and keep changing their minds. Also, you now have to "show your working" more or you get hit with a punitive charge. It's not conceptually hard but requires a lot of coordination both inside the banks and between the banks and regulators.

trhway 10y ago

considering that mortgage CDS-es total was on the scale of only $1T and it was enough to sink the economy...

bjterry 10y ago
Notional values can not be usefully compared between asset classes. That's why it's so dumb that people keep reporting them in the media. Comparing $1T of CDS to $493T of derivatives is like comparing Fahrenheit numbers to Celsius numbers. Comparing either of those to GDP is like comparing Fahrenheit and Calories.
- elif 10y ago
  What about comparing it to the world's total debt? that figure is more than double the current debt of the entire world (230T). Does the act of re-packaging that 230T really create an additional 263T in value? And even if so, is that not a hopeless feedback loop?
  - ddeck 10y ago
    I'm not sure what comparison you're trying to make. These derivatives are typically used modify the cashflows of those instruments for different issuer/investor preferences. The vast majority (>90%) of that OTC derivative figure is interest rate andFX swaps and the gross market value of those swaps are less than $15 trillion. The aggregate notional principal has also been declining for the last several years. Here's an example trade: I'm a European company and I've determined there's demand for my USD fixed rate bonds in America, but I need EUR to invest in my business and my profits are linked to interest rates so it's less risky for me to pay a floating interest rate. So to reduce my risk, I need to swap the bond cashflows into EUR and the fixed rate payments into floating rate payments. I issue $100 of bonds to US investors, and then I execute a $100 notional fixed-floating FX swap with a bank. That bank then executes a $100 notional fixed-fixed FX swap with another counterparty and a $100 notional (EUR equiv) rate swap with a different counterparty. So we have $300 notional value of OTC swaps and a $100 bond. And if we take out the central counterparty, the three swaps actually net into a single $100 swap.

phantom_oracle 10y ago

Financial firms dislike the idea of letting money sit idle, unless they are getting negative rates. What happens to that $300+ billion ~ $3.6 trillion collateral? I'm sure it will find its way into an investment as well.

minimax 10y ago
The collateral isn't limited to cash. Eligible collateral for initial margin includes cash, debt securities that are issued or guaranteed by the U.S. Department of Treasury or by another U.S. government agency, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, multilateral development banks, certain U.S. Government-sponsored enterprises’ (‘‘GSEs’’) debt securities, certain foreign government debt securities, certain corporate debt securities, certain listed equities, shares in certain pooled investment vehicles, and gold. From here: https://www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.pdf https://www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.p...
- zbobet2012 10y ago
  Wow, tbh invest in our (or our allies) bonds is an interesting way to structure this for sure.

deleted 10y ago

[deleted]