Bank initial margin posting raises liquidation concerns

Derivatives dealers are starting to voluntarily post initial margin to each other, in an attempt to reduce the capital they hold for derivatives counterparty risk. The savings can be significant, but some observers are worried about the liquidity of the collateral involved. Matt Cameron reports

In less than two months, long-awaited Basel III capital reforms will officially become a reality for many banks in both Europe and the US. In the run-up, derivatives dealers, like overweight bantamweight boxers crash-dieting to shed a few pounds before a fight, have been desperately trying to bring down their risk-weighted assets (RWAs), against which regulatory capital is held.

For most banks, the slimming-down strategy has centred on a handful of tried-and-tested techniques, including