US$240bn Collateral Required as IRS Move to Central Clearing

Moving US$42 trillion of the most vanilla, customer-to-dealer interest rate swaps (IRS) to centralised clearing will necessitate as much as US$240bn in immediate collateral requirements, said the Tabb Group. Moreover, requiring all over-the-counter derivatives (OTCDs) to be centrally cleared would require additional collateral of as much as US$2.2 trillion, according to the report.

Senior analyst and author of the report, ‘The Global Risk Transfer Market: Developments in OTC and Exchange-Traded Derivatives’, E Paul Rowady Jr, said: “OTC and exchange-traded derivatives [ETDs] are actually two interdependent, complementary, sometimes competitive ‘siblings’ within a single, global risk-transfer mechanism. In total, this is a market serving the risk management needs of all participants for all use cases, in what Tabb has named the global risk transfer market [GRTM].”

Tabb estimates that the GRTM will represent a US$700 trillion marketplace with US$3.7 quadrillion in annual turnover by the end of 2010. According to Rowady, one of the underappreciated aspects of the GRTM today is that total ETD activity, not OTCDs, consistently represents a majority (currently 55%) of total combined annual notional turnover, or over US$2 quadrillion for 2010. Furthermore, with estimated open interest of US$80 trillion, the ETD market sees a turnover rate of 25 times per year, as compared to turnover rates of two to three times for the OTCD market.

Despite all the attention on the complex world of OTCDs since the beginning of the credit crisis in 2008, the resulting level of misunderstanding continues to be unsatisfactory, uninformed – or both – which is why Tabb believes that the OTCD market should not be viewed as a US$600 trillion behemoth, but as a key component of a broader risk transfer mechanism for global financial firms, corporations and investment managers.


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