Collateral in the OTC Derivatives Market

Manmohan Singh

This chapter provides an overview of the over-the-counter (OTC) derivatives market and the associated drawbacks in the regulatory initiatives that propose to move these contracts to central counterparties (CCPs). As cross-border issues continue to unfold, these issues will remain topical, especially since there has been no closure on some key aspects (eg, CCP recovery and resolution)

INTRODUCTION

As part of the extensive regulatory reform proposals, the new rules will warrant a significant increase in the use of collateral across the financial system. Estimates by markets and policy institutions suggest that the Dodd–Frank Act, Basel III and European Market Infrastructure Regulation (EMIR) may warrant USD2–4 trillion in additional unencumbered collateral that will span margins for OTC derivatives at CCPs; liquidity ratio(s) under Basel III; and related needs stemming from parallel developments under the EMIR and Solvency II. At the same time, due to the global financial crisis and efforts at quantitative easing (QE) in the US and Europe, significant amounts of collateral have been drained out of the financial system and siloed at central banks. In addition, due to counterparty

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